Japanese economy faced recession for the third time in five years after going through two tyrannical shocks- the 2008 global financial crisis and the 2011 massive earthquake in the Great East Japan. As a result of this the fiscal stability faced a huge setback with public debt ratio having reached 200% of GDP. In order to protect the economy the government is required to take some urgent steps towards fiscal consolidation.
Even after two decades, when in 1980 the asset price bubble collapsed, Japan still is found stuck in the web of deflation. The asset and consumer prices are persistently declining despite the virtually zero policy interest rate and quantitative easing measures being adopted by the Central Bank.Slow output growth and rising public expenditures,in order to support aging population, have raised public debt ratio to 200% of GDP.Doing away with primary budget deficit calls for a large scale fiscal consolidation which will restrain nominal GDP growth, making it tougher to stabilize public debt ratio. In addition to this the rising age of working population, weak worldwide integration further restrain the growth potential. Political instability, with the candidate for the prime ministerial post being changed six times since 2008, causes inefficiency in political decision making and policies.
The new government has now pledged a three pronged strategy of bold monetary policy, flexible fiscal policy and a growth strategy that boosts private sector investment to exit from deflation and replenish Japan’s Economy. It has made a promise to come out with a new growth strategy by mid-2013, followed by a new medium term fiscal strategy.
The banking sector also faces huge uncertainties. With the government bonds forming one fifth of the total assets, a rise in the interest rates would hit the bank’s balance sheet.According to IMF data major banks are strong enough to face moderately large shocks but the regional banks do face the risks. Agricultural reform is at this time a priority sector. The mismanaged agriculture support puts heavy burdens on consumers and taxpayers, eroding the dynamism of the farming sector and making Japan’s participation in comprehensive bilateral and regional trade agreements difficult.
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Source: World Bank
The role of nuclear power has lowered down after the happening of the Fukushima accident. This calls for speeding up the development of renewable energy over the long run. This can be enacted by adopting certain fundamental reforms in the electricity sector so as to lessen the unfavorable impact of integrated, regional monopolies and the absence of a competent price mechanism.
Though the year 2012 was full of challenges for Japan but in the outlook for the year 2013-14 growth is expected to stabilize , although there are huge downside risks.Exports stabilized in late 2012 and therefore picked up some momentum in the first quarter of 2013. The recovery steps being undertaken by the new government have led to an upward revision in Japan’s outlook.The new government has announced 10.3 trillion Yen package. Yen has also depreciated by 15% against the dollar thus boosting exports.Over the same period , after the new government came into force , the equity prices have risen buy 30%.
Japan’s government must encourage labor force participation and boost productivity. With the working population projected to fall to a meager 40% by 2050, efforts need to be put in to make the most of Japan’s human resource, which includes not only males but also women , older population and youths.In order to boost productivity educational reforms are required to be enforced, starting with increasing investments in preliminary education.
The first and foremost step towards revival of Japanese economy is to end the 15 year old deflation. For this the Bank of Japan has established a new target of 2% inflation and has pledged adoption of “qualitative and quantitative monetary policy”.
|Last Updated on : 21th February 2015||Next Update : February 2016|