Macro- Economics–I- 1

Macroeconomics
Project report
On
Analysis of Japan’s macroeconomic
Economy of Japan Indicators

By-
By-
Group 85
Group
 Report On

Economy of Japan (Analysis of Japan’s Macroeconomic Indicators)

Submitted to

Dr. ChitrakalpaSen

Assistant Professor, Jindal Global Business School

In partial fulfillment of the requirement of the MacroEconomics -1 course

By

Group-5

(Ramasish Jaiswal, Ramesh Kumar, Sakshi Yadav, Tanya Chauhan, Karishma Sanduja)

MBA 2018

On 30TH Day of March 2019

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 Table of Contents

S. No. Particulars Page No.

1. Introduction 3
2. Graphical Representation of Japan’s Macroeconomic Indicators 4
2.1 Analysis of Real GDP 4
2.2 Analysis of Inflation Rate 6
2.3 Analysis of PPI 7
2.4 Analysis of IIP 8
2.5 Analysis of Interest Rate 9
2.6 Analysis of Export Growth 10
2.7 Analysis of Import Growth 11
2.8 Analysis of Labor Force Participation 12
2.9 Analysis of Unemployment Rate 13
2.10 Analysis of Investment Growth Rate 14
2.11 Analysis of Gross Fiscal Deficit 15
2.12 Analysis of Debt to GDP Ratio 16
3. Comparative analysis of Japan’s selected Economic Indicators 18
3.1 Comparative Analysis of Government Debt to GDP Ratio and IIP 18
3.2 Comparative Analysis of GDP Growth Rate and Unemployment Rate 19
3.3 ComparativeAnalysis of Inflation Rate and Unemployment Rate 20
3.4 ComparativeAnalysis Real GDP Growth Rate with Inflation Rate 21
3.5 Investment Growth Rate with Interest Rate 22
4 Japan’s Monetary Policy Analysis 23
5 Japan’s Fiscal Policy Analysis 24
6 Conclusion 25
A Appendix 1 27
B Appendix 2 28
C Glossary 29
D References 32

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1. Introduction

Economy of any country is the sum total of variety of things like policies, period and culture etc., it is the
reflection of nation’s wellbeing and an indicator of factors in which the nation have its energy invested.

From Meiji restoration (in 1868) wherein it was the only non-European country to be industrialized successfully
to being second largest economy after World War II defeat, Japan’s economy has always been a topic of great
interest for both layman and great economists. Japan’s economy is one of its kinds, wherein lot of general
theories of economics fails to explain its nuances. The country has progressed rapidly, converting itself from an
agrarian economy to industrial power while sustaining the growth momentum throughout (with few hiccups).
Japan’s economic story is a fairy tale with exceptional and phenomenal comebacks after serious destruction.

The economy of Japan presently is one of the most developed and it is the third largest economy (Nominal GDP
based) of the world. It is market-oriented and has a volatile currency exchange rate. Having said this we should
not think that Japan’s economy is all good and there’s no blues which it faces. Japan has the highest public debt
to GDP ratio in developed nations, although this is majorly owed by Japanese nationals. Japanese economy
faces considerable challenge by its declining population.

In order to measure the pulse of economy and also for critical analysis of its government policies and programs,
we have analyzed various economic indicators for Japan viz. Real GDP growth rate, inflation rate, PPI, IIP,
unemployment rate, labor force participation rate, gross fiscal deficit, interest rate, exports growth, import
growth, debt to GDP ratio, investment growth rate. Analysis of these set of economic indicators for Japan
provide us with detailed information about the state of economy while giving hint of the monetary and fiscal
policy adopted. Most of the data is from 1994 to 2016 ( 22 years) which is a pretty good period to assess and
analyze Japan’s economy as it covers most of the happenings in world and Japanese economy (the 2008
economic slowdown triggered by subprime mortgage crisis of USA, y2k crisis of 2000.

Real GDP growth rate when analyzed along with unemployment rate, interest rate etc. gives us the direction of
monetary and fiscal policy of government. PPI, investment growth rate and IIP give us the state of industries
and production therein. Labor force participation and unemployment rate gives us an idea of demographics and
work force availability. Debt to GDP ratio is a clear indicator of fiscal policy while inflation rate provides an
idea of monetary policy.

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2. Graphical representation of Macroeconomics Indicators

2.1 Real GDP

In the three decades of economic development following 1960, rapid economic growth referred to as
the Japanese post-war economic miracle occurred with average growth rates of 10% in the 1960s, 5% in the
1970s, and 4% in the 1980s, Japan was able to establish and maintain itself as the world's second largest
economy from 1978 until 2010. But our data set primarily focuses on period from 1994 to 2016, which suggests
that RGDP growth rate is more or less hovering around 2% from 1995 to 2008.

This owes also to the Lost Decade1 or the Lost 10 Years which is a period of economic stagnation in Japan
following the Japanese asset price bubble's collapse in late 1991 and early 1992. Broadly impacting the entire
Japanese economy, over the period of 1995 to 2007, GDP fell from $5.33 trillion to $4.36 trillion in nominal
terms, real wages fell around 5%, while the country experienced a stagnant price level.

Fig. 1. Real GDP Growth Rate in Japan from 1995-20162

1
The term originally referred to the years from 1991 to 2000, but recently the decade from 2001 to 2010 is often included so that the
whole period is referred to as the Lost Score or the Lost 20 Years
2
Refer Table A1 in Appendix 1 for data
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As Japan is an Open economy, effect of world economic situation is clearly visible in Real GDP growth rate of
Japan viz. the sudden drop from 2008 to 2010 is a good example where in the GDP growth suffered dearly due
to world economic slowdown triggered by subprime mortgage crisis in USA. Also the peak of 2011 is result of
expansionary policies of government which was effected from 2010 to reduce the deflationary pressure off the
economy. Thereafter RGDP growth rate averages around 1.5 % up to 2016. As of 2017- 18 RGDP growth rate
is 1.7%. This improvement in overall situation of growth after 2012 can be attributed to ‘Abenomics’,

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2.2 Inflation Rate

During the 1970’s inflation in Japan spiked to an annual average of over 23% in 1974 up from 6.42% in
1971.1980 saw the final spike in Japanese inflation to 7.82% for the year and from there Japanese inflation fell
steadily until it was virtually non-existent at 0.11% in 1987.Japanese inflation ticked upward over the next four
years and by 1991 it had reached an annual average of 3.28% but over the following four years it declined so by
1995, registered a deflationary -0.10%. For the next 18 years from 1995 to 2013 Japan battled deflation with
only 1997 and 2008 having inflation above 1%.

Fig. 2. Inflation Rate in Japan from 1994-20163

After 2008 a trough is observed in the trend owing to the financial crisis which emanated in 2008, from 2010
onwards there are signs of recovery from deflation which pinnacles in 2014 as decade high inflation rate of 2.76
But overall Japan’s Inflation is somewhat cyclical with cycles of mild deflation and moderate inflation. In
recent times the government’s “Abenomics” policy has made a dent in deflation and brought price stability by
inflation targeting policies and programs, one being lowering the interest rates via NIRP4 to promote
investment.

3
Refer Table A1 in Appendix 1 for data
4 Negative Interest Rate Policy
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2.3 PPI (Producer Price Index)

Producer Prices in Japan averaged 88.26 Index Points from 1960 until 2019, reaching an all time high of 112.50
Index Points in September of 1980 and a record low of 47.40 Index Points in June of 1962. But our data set for
PPI pertains to period of 1994-2016 which clearly shows a declining trend.

Fig. 3. PPI of Japan from 1994-20165

As PPI is almost consistently falling which clearly shows the technical prowess Japan has acquired with time.
This has enabled the industry to reduce the production costs consistently. A crest in 2008 is an indication of
world economic slowdown which affected Japan dearly as it is a good example of open economy. A bump after
2012 through 2014 to 2016 is also an indication of increased production prices in recent years owing to the
ageing population wherein working age population is decreasing. But this may be due to demographic decline
caused by a low birth rate and ageing population which poses a major long- term economic challenge.

5
Refer Table A1 in Appendix 1 for data
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2.4 IIP (Index of Industrial Production)

Production in Japan averaged 5.02 percent from 1954 until 2019, reaching an all-time high of 30 percent in
February of 1960 and a record low of -37.20 percent in February of 2009. This owes also to the Lost Decade or
the Lost 10 Years which is a period of economic stagnation in Japan following the Japanese asset price bubble's
collapse in late 1991 and early 1992

Fig. 4. IIP of Japan from 1994-20166

Japan’s index of industrial production shows an increasing trend from 1994 to 2008 due to innovative and
improved manufacturing techniques employed. But the economic slowdown of 2008 affected industries dearly,
although industries recovered with improving world scenario but production growth has become stagnant, partly
because of policies adopted by USA and China. Japan’s industries suffered due to policy actions of Obama
Government which favored domestic production and Japan being export oriented suffered. Also China’s
increasing manufacturing clout is responsible for stagnation in Japan’s industrial growth. China’s rise in world
manufacturing arena with high end technologies and cheaper labor affected negatively the Japan’s Industrial
Production. Also the deflationary pressure which was prevailing in the economy since mid-1990s is also
responsible for poor performance of industry.

6
Refer Table A1 in Appendix 1 for data
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2.5 Interest Rate

Real interest rates in Japan are of much significance, effects change in which has been studied world over.
Japan has started reducing it’s interest rates since 1995(with an exception from 2006 to 2008 which is due to
extraordinary world economic situation) There are two reasons why central banks impose artificially low
interest rates. The first reason is to encourage borrowing, spending and investment.

Fig. 5. Interest rate of Japan from 1994-20167

Second is to boost economic growth and to promote lending to various more productive purposes. In recent past
Japan has gone to negative interest rate. Negative interest rates mean depositors pay money to save their money,
a reversal of the normal rules of economics. The idea is to encourage banks to put their money to more
productive use, lending it to households and businesses. Negative rates are supposed to then ripple through
economies by lowering the cost of borrowing for everyone — something that should encourage economic
growth.

7
Refer Table A2 in Appendix 2 for data
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2.6 Export Growth Rate

Japan's Total Exports Growth data is updated monthly, from Apr 1996 to Sep 2018 the average rate of 5.8 %.
The data reached an all-time high of 24.1 % in Feb 2010 and a record low of -23.9 % in Feb 2009.

Fig. 6. Export Growth of Japan from 1997-20168

Japan’s export growth rate trend apprises us of world economic situation which is evident from the trend from
2008 to 2010 where the fallout of global meltdown of 2008 is affecting Japan’s export dearly. Japan’s economy
recovered pretty fast and gained huge momentum which resulted in highest export growth in 2010, this
normalized in 2011 through 2014 to 2016. Presently Japan’s export-dependent economy faces a challenge
as growth slows in China, its largest trading partner. The effects of Beijing’s deleveraging policies on domestic
demand are probably having a big impact. In addition to possible fallout from the U.S.-China trade war, the
threat of U.S. car tariffs still looms and Tokyo officials are set to begin negotiating a trade deal with their U.S.
counterparts. As a counterweight, the Japan-led TPP-11 trade agreement kicked off at the end of 2018 and
Japan’s pact with Europe9 is also in the pipeline.

8
Refer Table A2 in Appendix 2 for data
9
https://www.bloomberg.com/news/articles/2018-12-19/japan-s-exports-hold-up-as-trade-war-risks-cloud-the-outlook
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2.7 Import Growth Rate

Japan lacks many raw materials needed for industry and energy, such as oil, coal, iron ore, copper, aluminum
and wood. Japan must import most of these goods. In order to pay for these imports, Japan exports a variety of
manufactured goods to other countries. Imports in Japan averaged 2996.47 JPY Billion from 1963 until 2019,
reaching an all-time high of 8047.03 JPY Billion in January of 2014 and a record low of 162.06 JPY Billion in
January of 1963.

Fig. 7.Import Growth of Japan from 1994-201610

Japan has opened its border to world trade pretty early in history with respect to it’s Asian neighbors. Its import
growth rate is somewhat consistent with its export growth. Again the sudden fall in imports in 2008 is clearly
evident which is an indication, of effect of, global slowdown, on Japan’s economy wherein demand in Japan
drastically reduced. Majority of Japan imports deal with oil and petroleum products, raw materials and food
products, fluctuation in prices of these affects the import bill of Japan in a big way. A fall in from 2013 to 2015
is due to reduced oil prices in international market. In recent times government of Japan under Prime Minister
Shinzo Abe is trying hard to stabilize Japan’s import growth by consistently taking policy decisions collectively
referred as ‘Abenomics’.

10
Refer Table A2 in Appendix 2 for data
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2.8 Labor Force Participation Rate

Labor force participation from Jan 1968 to Sep 2018 has an average of 62.7 %. The data reaches an all-time
high of 67.9 % in Jun 1968 and a record low of 58.5 % in Dec 2012. But overall the trend is having negative
slope.

Fig. 8.Labor Force Participation Rate of Japan from 1994-201611

Since the total population of Japan is decreasing its labor participation is somewhat decreasing till 2012 after
which it has start increasing, as labor participation rate is % of adult (15 -64 yrs.) population in workforce. As
the population of young people (15 -64 yrs.) is continue decreasing. Also as more elderly people in Japan are
working beyond retirement age which is causing this rate to increase after 2012.Japan has an ageing population
wherein working age population is decreasing, but this may be due to demographic decline caused by a low
birth rate. This ageing population poses a major long- term economic challenge for Japan.

11
Refer Table A2 in Appendix 2 for data
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2.9 Unemployment Rate

Unemployment Rate in Japan averaged 2.73 percent from 1953 until 2019, reaching an all-time high of 5.50
percent in June of 2002 and a record low of 1 percent in November of 1968.

Fig. 9.Unemployment Rate of Japan from 1994-201612

Unemployment rate which used to 5.6 % in 2002 started coming down due to growth in GDP and also due to
decrease in working population again a peak of 5.3 % is observed in 2010 which is due to the after effects of
2008 financial crisis. After 2010 this is consistently decreasing owing to movement of economy from deflation
to inflation. This can be testimony to the fact that a decent rate of inflation is necessary for economy to perform
well.

Recently the seasonally adjusted unemployment rate in Japan dropped unexpectedly to 2.3 percent in February
2019 from 2.5 percent in the previous month while markets had expected 2.5 %. This all positivism is often
attributed to success of ‘Abenomics’.

12
Refer Table A1 in Appendix 1 for data
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2.10 Investment Growth Rate

Historically, domestic investment in industry and infrastructure was the driving force behind growth in Japanese
output. Both private and public sectors invested in infrastructure, national and local governments serving as
coordinating agents for infrastructure build-up. Private Investment in Japan averaged -0.53 percent from 2008
until 2018, reaching an all-time high of 12.80 percent in the second quarter of 2018 and a record low of -25.33
percent in the first quarter of 2009. But our dataset is of total investment growth rate from 1994 to 2016 wherein
we see a peak in 1996 and 2013 and a sharp dip in 2009, but overall the average growth rate is between 0 and 1
percent.

Fig. 10.Investment Growth Rate of Japan from 1994-201613

In last two decades the investment growth in Japan is fluctuating which is partly a reflection of world economic
situation and other factors as natural calamities etc. The slowest growth has been observed in 2009 (-9.74%),
which is majorly due to global economic slowdown and world financial crisis.

13
Refer Table A2 in Appendix 2 for data
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2.11 Gross Fiscal Deficit

Gross fiscal deficit in Japan has consistently increased since 1960s but then it started declining in 1990s but in
2008 the deficit again increased up to 10% , which may be because of financial crisis caused due to subprime
mortgage crisis. But due to positive intervention of government deficit is now decreasing from 2010 onwards.

Fig. 11.Gross Fiscal Deficitof Japan from 1994-201614

Although Government of Japan has worked hard to reduce the fiscal deficit from the peak of 10.2 % of GDP to
somewhere near 3.7 %, Mr. Abe’s target of 3% is still far. Recent announcement for increase in VAT from 8%
to 10% from October 2019 in order to finance the rise in social security costs due to the ageing population and
public works spending due to rising incidents of natural disasters is a welcome move in right direction.

14
Refer Table A2 in Appendix 2 for data
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2.12 Debt to GDP ratio

Japan’s economy is one those who have large debt to GDP ratio but still the size of economy is so large that it
sustains because of the assets owned. As Debt to GDP ratio is about 200% One may expect that Japan, with its
eye-watering debt levels, would be an investment "leper," where foreign direct investment (FDI) would actively
avoid this frail and debt-ridden economy.

We witnessed that since 1997, debt levels grew consistently, GDP growth stagnated and the returns of the 10-
year government bonds were negative. Despite of these worrying indicators, Japan continues to be a stable and
creditworthy nation that attracts investors.

Fig. 12.Debt to GDP ratio of Japan from 1994-201615

First off, let’s have a look at how Japan got trapped in debt, especially after WW2 when the economy rose to
power and prominence. Deflation has been Japan’s economic setback since the early 1990s. As the expected
asset bubbles that were created after the WW2 finally busted in 1989, after the increase of inter-bank lending
rate from the Bank of Japan. Once the stock market crashed and equity prices dropped, banks and insurance
companies were left with lots of bad debt.

15
Refer Table A1 in Appendix 1 for data
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The Japanese government and central bank supported these organizations by bailing them out and providing
low-interest credit. Thus, these firms have to rely on support. But this eventually became unsustainable, so
banking institutions had to be consolidated and nationalized.

Throughout many years, other fiscal stimulus initiatives were also used to help reboot the stumbling economy.
Because of these government-approved actions, Japan’s debt level skyrocketed to become the highest in the
world.

But all is not lost .Japan is still well-off because it can adjust interest rates at low levels so that repayment
values stay low relative to the overall debt level. Also Japan is unlikely going to default anytime soon, but what
will happen in case its debt interest rate starts to peak?

To lower the burden of debt, Japan’s central bank reduces the interest rate and purchases government bonds to
supply the financial system with more cash. Theoretically, this artificially minimizes the total interest
repayment. Because the Japanese government’s debt is so high, the interest expense can easily be affected by
rate increases. In fact, Japan’s debt was 15 times higher than the tax revenue collected by the government in the
end of 2016.

As we stated above, Japan is still on the high ground because the government can sell most of its debts to its
citizens, which is known as domestically held debt. Deflation (decreasing prices of goods and services) that
occurs for long periods of time make government debt and other low yielding assets much more attractive.

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3. Comparative analysis of various selected Economic Indicators

3.1 Comparative analysis of Japan‘s Government Debt to GDP ratio and IIP

Government debt of Japan is consistently rising with no significant improvement in IIP, hence we can conclude
that there is almost zero correlation between these but Debt to GDP ratio and IIP are having correlation
coefficient of -0.13544. Here inference is that both are having negative and weak correlation between them.

Fig. 13.Graph for Govt. Debt to GDP ratio vs IIP of Japan from 1994-2016

So it can be concluded from this that majority of debt is directed towards consumption and not to production
which can also be corroborated to the import bill of Japan which is large. So capital formation is low leading to
stagnation in industrial production. This can be corrected by investment in capital goods and increasing exports
to balance import increase, which can be funded by domestic savings if possible.

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3.2 Analysis of Japan’s Real GDP Growth Rate in relation with Unemployment Rate

Classical economics suggests that unemployment in economy decreases with growth in Real GDP, but there are
many exceptions to this, Japan’s case for that matter is unique due to the intermixture of variety of constraints.
Japan’s unemployment rate is not affected much by GDP growth rate. GDP growth was negative in 2009 and
2010 but unemployment rate is almost unchanged. This is due developed nature of economy wherein some
structural and frictional unemployment is always there.

Fig. 14.Graph of Real GDP growth rate vs Unemployment rate of Japan from 1994-2016

Correlation between Real GDP growth Rate and Unemployment Rate is -0.25055 so both are having a week
negative correlation between them.

This analysis suggests that unemployment in Japan is majorly frictional and structural (ageing population)
which is not affected much by Real GDP growth rate. The negative correlation is an anomaly which owes its
explanation in the declining demography of Japan. Also since majority of jobs in Japan are technical so people
with no technical background are disadvantaged.

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3.3 Analysis of Japan’s Inflation rate with Unemployment Rate

Inflation and unemployment are inversely related so while inflation increases unemployment decreases, hence a
normal level of inflation is required in every economy. Evident from the graph is that years of high deflation
(opposite of inflation) have high unemployment also. Barring some exceptions this holds good for Japan.

Fig. 15.Graph of Inflation rate vs Unemployment rate of Japan from 1994-2016

Correlation between Real Inflation Rate and Unemployment Rate is -0.62413. So both are having a Moderate
negative correlation between them.

This negative correlation is in accordance with general theories dealing with inflation and unemployment. So at
high inflation when demand is also high we have low unemployment. While the reverse is true for deflation,
which explains the 5 – 6 % unemployment rate during deflationary period in Japan’s economy. Present policies
of government aimed at reducing deflationary pressure off the economy is step in right direction to reduce
unemployment rate.

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3.4 Analysis of Japan’s Real GDP Growth Rate in relation with Inflation Rate

High inflation is accompanied with high GDP growth rate and deflation is the result of slowdown in growth of
GDP(evident in year 2009). Correlation between Real Inflation Rate and GDP growth Rate is 0.065966. So both
are having an Extremely Weak positive correlation between them.

Fig. 16.Graph of Inflation rate vs Real GDP growth rate of Japan from 1994-2016

It can also be concluded at length that there is no correlation between Real GDP growth and inflation which is
an anomaly in Japan. Normally there is somewhat strong relation between GDP growth rate and inflation rate,
so as when GDP increases, inflation also increases.

This anomaly in Japan can be attributed to developed nature of economy and low domestic demand and Japan
economy is export based so any rise in GDP increases export and is not reflective of demand. Since demand
fuels inflation so it is affected by export based rise in GDP.

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3.5 Analysis of Japan’s Investment Growth and Interest rate

Fig. 17.Graph of Investment rate vs Interest rate of Japan from 1994-2016

The correlation Coefficient between Investment Growth Rate and Interest Rate is - 0.02539977 which means
they are having very weak negative correlation between them.
Japan introduced negative interest rate in 2016 to boost investment as Negative interest rate policy (NIRP) is a
last-ditch attempt to generate spending, investment and modest inflation. There are two reasons why central
banks impose artificially low interest rates. The first reason is to encourage borrowing, spending and
investment. Modern central banks operate under the assumption that savings are pernicious unless they
immediately translate into new business investment. When interest rates drop near zero, the central bank wants
the public to take your money out of savings accounts and either spend it or invest it. This is based on the
circular flow of income model and the paradox of thrift16.

But no country has proven less effective with low interest rate policies or high national debt than Japan.

16
https://www.investopedia.com/terms/p/paradox-of-thrift.asp
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4. Japan’s Monetary Policy Analysis

The Bank of Japan, as the central bank of Japan, decides and implements monetary policy with the aim of
maintaining price17 stability. Price stability is important because it provides the foundation for the nation's
economic activity. In implementing monetary policy, the Bank influences the formation of interest rates for the
purpose of currency and monetary control, by means of its operational instruments, such as money market
operations. The Bank of Japan Act states that the Bank's monetary policy should be "aimed at achieving price
stability, thereby contributing to the sound development of the national economy."18In a market economy,
individuals and firms make decisions on whether to consume or invest, based on the prices of goods and
services. When prices fluctuate, individuals and firms find it hard to make appropriate consumption and
investment decisions, and this can hinder the efficient allocation of resources in the economy. Unstable prices
can also distort income distribution.

The Bank's Policy Board decides on the basic stance for monetary policy at MPMs. The Policy Board discusses
the economic and financial situation and then decides an appropriate guideline for money market operations at
MPMs. After every MPM, the Bank releases its assessment of economic activity and prices as well as the
Bank's monetary policy stance for the immediate future, in addition to the guideline for money market
operations. According to the guideline for money market operations decided at MPMs19, the Bank controls the
amount of funds in the money market, mainly through money market operations. The Bank supplies funds to
financial institutions by, for example, extending loans to them, which are backed by collateral submitted to the
Bank by these institutions. Such an operation is called a funds-supplying operation. The opposite type of
operation, in which the Bank absorbs funds, by for example issuing and selling bills, is called a funds-absorbing
operation.

17
"Price" here denotes the overall level of prices of various goods and services.
18
https://www.boj.or.jp/en/mopo/outline/index.htm/
19
Monetary Policy Meetings
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5. Japan’s fiscal policy analysis20

We find that there are three key forces that likely improved Japan’s fiscal situation relative to more pessimistic
predictions which economists had for long time. First, the Japanese government has shown remarkable ability to
hold down per capita expenditures on social pensions and healthcare. Second, the Japanese government has
been able to raise taxes substantially (recent one is proposed hike of VAT from 8% to 10% from October 2019).
Third, the remarkable monetary policy pursued by the Bank of Japan( NIRP21) that has resulted in a dramatic
decline in the amount of government bonds held by the private sector.

Japanese government has a huge amount of gross debt on the one hand, but a huge amount of gross assets on the
other hand. Therefore, the net debt-GDP ratio is a lot lower than the gross debt-GDP ratio. This also shows
signs of stabilizing. (Fig.18)

Fig. 18Graph of Japan’s Debt levels as Percent of GDP

20
https://www.forbes.com/sites/mwakatabe/2017/11/23/why-the-fear-of-a-fiscal-crisis-in-japan-is-overblown/#1c8c30ce34ae
21
Negative interest rate policy
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6. Conclusion

Although Japan’s economy is strong and large but it is not without problems viz. the growing debt to GDP ratio
is a concern, stagnant industrial production, high dependence on import and diminishing export are points of
great concern. Although growth has picked up in recent years sustaining that is not an easy game. Negative
interest rates policy (NIRP) of Japan’s central bank was designed to encourage them to use their reserves to lend
to businesses in an attempt to counter Japan's economic stagnation had not paid off well. The negative interest
rates might incentivize banks to withdraw reserve deposits, but they do not create any more creditworthy
borrowers or attractive business investments. Japan's NIRP certainly did not make asset markets more rational.
There appears to be a disconnect between standard macroeconomic theory by which borrowers, investors and
business managers react fluidly to monetary policy and the real world. While this economic woe present major
problem for Prime Minister Shinzo Abe and BOJ22 governor Haruhiko Kuroda, they can serve as a cautionary
tale for the rest of the world.

Japan currently has such a high level of debt that it’s doubtful the country can ever repay the full amount.
Because the Japanese government’s debt is so high, the interest expense can easily be affected by rate increases.
Japan’s population is shrinking and aging, so it’s highly doubtful that the country can increase national savings
to a point where purchasing government bonds is sustainable. And because Japan is a net importer of goods, the
only way to reduce debt is by having foreign investors. The world today is in an odd place, as many developed
markets have all-time low interest rates. Investors are playing safe by trying to reduce losses on fixed income
assets. That means for now, Japanese government bonds don’t seem that bad. But to ensure that Japan’s interest
payments and spending obligations will not be defaulted, the government has to make sure foreigners are
buying its debt and the only option to gain more foreign investors is to have higher yielding debt options. This
is a typical perpetual debt trap, a vicious cycle where borrowing to service an ever-growing interest repayment.
The more you’re borrowing to pay debts today, the more interest and obligations you’ll have to face tomorrow.

Japan can increase economic growth to outpace its growing debt burden. But for this method to work, it has to
enhance industries that provide the highest tax incomes. A proven method to achieve this is the Asian Capital
Development (ACD) model, which brought much success after WW2. However, subsidization and window
guidance require so much funding that the country may have to increase borrowing (which is difficult as the
country is head over heels with debt!).

22
Bank Of Japan
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Given the demographics in Japan, the labour force should not be growing at the fastest pace since the 1990s. In
fact, it should be shrinking, also at constant LFPR23 within age cohorts, a stagnant and aging population should
be generating a negative labour force growth rate. But in reality, the labour force is growing just under 2% per
year. In Japan, there are two key sources of this hidden slack. The most obvious and impactful is rising
participation rates, especially female participation. The surge in women joining the labour force has been
dramatic, especially into part-time employment. This is a phenomenon that has been ongoing for some time.
Whilst there is clearly a limit to this (only 100% of the population can join the labour force), there is no reason
it cannot continue for some time yet as the labour market continues to tighten. Although the immigration policy
is very tight in Japan, foreign labour is being implicitly allowed, even encouraged, as labour market shortages
start to bite. Also this is becoming an important source of hidden slack in Japan.

Labour force, negative interest rates and high debt to GDP ratio are woes which can cause serious crisis if not
dealt well, but Abenomics have made Japan’s fiscal crisis less likely, as can be seen in the graph(Fig.19),
Japan's nominal growth rate is exceeding nominal interest rate. This gives more reason that Japan's debt-GDP
ratio will not explode and economy will survive through all this.

Fig. 19. Graph of Japan’s Interest rate in relation with Nominal Growth Rate

23
labour force participation rate
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 Appendix 1

Table A1

DEBT To
YEAR RGDP GR UNEMP Rate IIP Inflation Rate CPI PPI
GDP Ratio
1994 2.64 3.000 56.044 98.351 0.70 97.97 116.35
1995 2.733 3.267 61.736 101.343 -0.13 97.86 114.61
1996 3.137 3.492 66.499 103.531 0.14 97.88 113.84
1997 1.088 3.542 74.143 107.655 1.75 99.53 112.93
1998 -1.180 4.250 81.574 100.481 0.66 100.20 111.82
1999 -0.158 4.875 91.996 101.074 -0.34 99.86 110.29
2000 2.751 4.917 100.461 106.053 -0.68 99.32 108.86
2001 0.399 5.242 104.441 99.621 -0.74 98.52 107.37
2002 0.084 5.608 113.602 98.452 -0.92 97.64 105.36
2003 1.570 5.467 124.032 102.294 -0.26 97.38 103.66
2004 2.191 4.942 129.874 107.121 -0.01 97.36 103.03
2005 1.660 4.633 130.463 108.860 -0.28 96.82 103.00
2006 1.390 4.300 130.829 113.298 0.25 97.04 102.83
2007 1.644 4.033 134.218 116.604 0.06 97.11 103.00
2008 -1.095 4.150 140.413 112.827 1.38 98.46 103.90
2009 -5.421 5.317 158.875 89.391 -1.35 97.11 99.61
2010 4.206 5.308 162.296 102.777 -0.72 96.52 98.65
2011 -0.098 4.806 177.961 99.929 -0.27 96.24 98.27
2012 1.502 4.558 186.025 100.057 -0.05 96.22 97.13
2013 2.018 4.233 188.881 99.458 0.35 96.54 99.31
2014 0.289 3.742 194.428 101.242 2.76 99.22 100.00
2015 1.258 3.550 197.037 100.000 0.79 100.00 100.00
2016 0.611 3.258 195.520 100.225 -0.12 99.88 96.39

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 Appendix 2

Table A2

Labour Force
Gross Fiscal
YEAR Interest rate Export_GR Import_GR Participation Investment GR
Deficit
Rate
1994 1.75 9.5558 14.0608 63.6000 -2.230514 -3.811
1995 1.75 11.5037 21.8258 63.4000 3.491875 -4.392
1996 0.50 -7.1311 3.8930 63.5000 6.49464 -4.985
1997 0.50 2.5885 -3.0160 63.7000 -1.995838 -3.596
1998 0.50 -7.7044 -17.5059 63.3000 -3.985991 -10.225
1999 0.50 7.8183 11.3484 62.9000 -0.968039 -6.873
2000 0.50 14.1210 22.1242 62.4000 0.508929 -8.252
2001 0.50 -15.5837 -8.1360 62.0000 -1.706615 -6.538
2002 0.10 2.8745 -3.2638 61.2000 -5.110898 -7.914
2003 0.10 13.3038 13.4365 60.8000 -0.771977 -8.046
2004 0.10 19.7252 18.4543 60.4000 0.109898 -5.881
2005 0.10 5.5473 14.3327 60.4000 3.092622 -4.963
2006 0.10 8.7466 11.5791 60.4000 0.380405 -3.492
2007 0.40 10.7177 7.8069 60.4000 -1.910569 -3.210
2008 0.75 9.3044 22.2529 60.2000 -3.789435 -4.531
2009 0.30 -25.9080 -27.7124 59.9000 -9.740147 -10.192
2010 0.30 32.6426 25.9602 59.6000 -1.593052 -9.534
2011 0.30 7.1262 23.5701 59.3160 1.655674 -9.441
2012 0.30 -3.1990 2.8501 59.1000 3.543746 -8.613
2013 0.30 -10.3113 -5.6954 59.3000 4.931365 -7.911
2014 0.30 -3.5090 -2.4778 59.4000 3.054434 -5.636
2015 0.30 -9.5095 -20.2185 59.6000 1.647526 -3.803
2016 0.30 2.6580 -6.2793 60.0000 -0.31321 -3.666

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 Glossary

1. Real GDP -It is the market value of all the final goods and services of the country in terms of some base
year prices.
2. Inflation Rate - Inflation refers to the overall increase in weighted average prices of different goods
and the percentage change in overall level of prices is the rate of inflation or inflation rate.
3. PPI (Producer Price Index)24- Producer price indices in manufacturing measure the rate of change in
prices of products sold as they leave the producer. They exclude any taxes, transport and trade margins
that the purchaser may have to pay. They are often seen as advanced indicators of price changes
throughout the economy, including changes in the prices of consumer goods and services. In Japan, the
Producer Price Index measures the average change in price of goods and services sold by manufacturers
and producers in the wholesale market during a given period.
4. IIP (Index of Industrial Production)25 - The industrial production index measures trends in output of
Japanese manufacturing, mining and utilities. Output refers to the physical quantity of items produced,
unlike sales value, which combines quantity and price. The index covers the production of goods for
domestic sales in Japan and for export. It excludes production in the agriculture, construction,
transportation, communication, trade, finance, and service industries; government output; and imports.
The IP index is then developed by weighting each component according to its relative importance in the
base period.
5. Interest Rate -It is the rate which banks charge for lending money or the rate at which the depositor
gets interest once he/she deposits money with the banks.

24
https://data.oecd.org/price/producer-price-indices-ppi.htm
25
https://www.economy.com/dismal/indicators/definition/jpn_production

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 6. Export26 -An export is a function of international trade whereby goods produced in one country are
shipped to another country for future sale or trade. Exports are a crucial component of a country’s
economy, as the sale of such goods adds to the producing nation's gross output.
7. Imports27 -Imports are defined as goods produced outside the boundaries of one country, which are then
purchased by that country. Together with exports, imports represent the keystone of foreign trade A
greater proportion of imports relative to a country’s Gross Domestic Product (GDP) indicates a
country’s degree of dependence on purchases from abroad. Demand for imports depends on economic
conditions in the buying country, as well as the exchange rate and relative prices.
8. Labor Force Participation Rate - The labor force participation rate is the percentage of the adult
population that is the in the labor force. It is important tool used to compute the statistics for the overall
population and for groups within the population: men and women, whites and black, teenagers and
prime-age worker.
𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 𝑝𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 = 𝑋100
𝑎𝑑𝑢𝑙𝑡 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
9. Unemployment Rate - The unemployment rate measures the fraction of the labor force that is out of
work.
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑜𝑙𝑦𝑒𝑑
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = 𝑋100
𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
10. Investment Growth Rate - Investment growth rate is annual growth rate of capital formation based on
local currency. Gross Capital formation (domestic investment) consists of outlays on additions to the
fixed assets of the economy plus net changes in the level of inventories. Fixed assets include land
improvements, plant, machinery and equipment purchases

26
https://www.investopedia.com/terms/e/export.asp

27
https://www.focus-economics.com/economic-indicator/imports-usd

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 11. Gross Fiscal Deficit28- The gross fiscal deficit (GFD) is the excess of total expenditure including loans
net of recovery over revenue receipts (including external grants) and non-debt capital receipts. The net
fiscal deficit is the gross fiscal deficit less net lending of the Central government.
Gross Fiscal Deficit = (Total Expenditure + Loans Servicing) - (Revenue Receipts + Non Debt Capital
Receipts)
12. GDP Deflator -The GDP Deflator, also called the implicit price deflator for GDP, is the ratio of
nominal GDP to real GDP. The GDP deflator measures the prices of output relative to its price in the
base year. It reflects what’s happening to the overall level of prices in the economy.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 =
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
The GDP Deflator measures the change in prices of final goods and services and it is considered as a
key indicator for inflationary pressures, that provides insight into the future direction of monetary
policy.
13. CPI (Consumer Price Index)29 - Consumer Price Indices (CPI) measure changes over time in general
level of prices of goods and services that households acquire for the purpose of consumption. CPI
numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and
central banks for inflation targeting and for monitoring price stability, and as deflators in the national
accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is
therefore considered as one of the most important economic indicators.

28
https://economictimes.indiatimes.com/definition/fiscal-deficit
29
https://data.gov.in/catalog/all-india-consumer-price-index-ruralurban
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 References

➢ Macroeconomics by N. Gregory Mankiw.

➢ Principles of Macroeconomics by N. Gregory Mankiw.
➢ Macroeconomics by Dornbusch, Fischer and Startz.
➢ Data from Federal Reserve Bank, St. Louis: https://fred.stlouisfed.org/
➢ Data from World Bank Website https://www.worldbank.org/
➢ https://www.japantimes.co.jp/news/2018/05/12/national/politics-diplomacy/japan-considers-new-target-
reduce-fiscal-deficit-3-gdp/#.XJ4or9IzbIW
➢ https://www.bbc.com/news/business-35436187
➢ https://www.investopedia.com/articles/markets/080716/why-negative-interest-rates-are-still-not-
working-japan.asp
➢ https://sbr.com.sg/economy/asia/japans-2019-budget-deficit-worsen-38-gdp-consumption-takes-hit
➢ https://www.boj.or.jp/en/statistics/category/rate.htm/
➢ https://www.bloomberg.com/news/articles/2018-12-19/japan-s-exports-hold-up-as-trade-war-risks-
cloud-the-outlook
➢ https://www.forbes.com/sites/peterpham/2017/12/11/when-will-japans-debt-crisis-
implode/#61dbd3414c6d
➢ https://www.heritage.org/index/country/japan
➢ https://www.ft.com/japan-economy
➢ https://www.thebalance.com/japan-s-economy-recession-effect-on-u-s-and-world-3306007
➢ https://www.japantimes.co.jp/opinion/2019/02/19/commentary/japan-commentary/japans-economy-far-
hopeless/
➢ https://www.weforum.org/agenda/2018/12/japans-economic-outlook-in-five-charts/
➢ https://en.wikipedia.org/wiki/Economic_history_of_Japan
➢ https://www.britannica.com/place/Japan/Economic-transformation
➢ http://factsanddetails.com/japan/cat24/sub155/item904.html

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