Abenomics Complexities and the Japanise Recovery Effort - Alldamoney

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Abenomics Complexities and the Japanise Recovery Effort

Recently, Japanese Prime Minister Shinzo Abe came through a no confidence motion tabled by opposition parties as his allies approved to postpone a sales tax hike in other to further avoid shocks to the ever faltering economic recovery. The Japanese economic problems remain a mystery or rather a time bomb waiting to explode.

The world's former second largest economy with an impressive economic growth since the last 40 years, that suddenly stagnated in the last six years with no recovery in sight. The Japanese economy’s prosperity makes its failures difficult to address. With a per capita income in 2015 est. of $38, 000, unemployment rate at 3.3%, figures substantially better than those attained in the US and most European Countries one can’t stop to ask what then it’s wrong with this country whose affluence is palpable to anyone who visits Tokyo. But then the Japanese economy over the past years slipped into deflation, in that consumer prices are lower in first quarter 2016 than a year ago, whereas real GDP is deteriorating. Despite a near zero borrowing costs, the fiscal deficit is running at nearly 7% of GDP, and government debt exceeds 230% of GDP. And with a shrinking labor force are that portray a higher debt ratios in the future.

For one thing, the problems with Japan economy are things that make it inefficient. That is those things that reduce the ability of the economy to produce goods and services thereby limiting its supply capacity. The present problem with the Japanese economy however is not too little supply but mainly little demand in such that the economy is not utilizing at full capacity its existing production Facing an economic stagnation there can never be a quick fix Japan has many problems but which country does not? The main problem to Japanese recovery presently is not mainly the long list of structural difficulties but a simple lack of clear thinking and courage.
When in 2013, Prime Minister Shinzo Abe launched Japan's most serious effort to end Japan's deflationary struggle, a series of stimulus and reform packages collectively known as Abenomics was introduced in order to address and resolve issues that threaten the economy and address the slowly unfolding fiscal crisis.

These policies are:

Wage Growth

To increase consumer spending Prime Minister Abe has pressured Japanese companies to raise wages for workers this will create a virtuous circle of increased consumer spending, resulting in higher corporate profits that will create room for further wage increases. As an enticement, corporate tax rate is lowered through Pursuant to the act, which came into force on 1 April 2016, the corporate tax rate has been reduced from 23.9 percent to 23.4 percent, with effect from the business year commencing on and after 1 April 2016. If these policies convince corporate executives to spend the tax savings on wage increases, it should increase consumer spending, which should in turn boost growth.

Value Added Tax

The increase in Japan's value-added tax (VAT) from 5 to 8% Consumer spending in 2014 did result in a declining Consumer spending. Understandable with an enormous debt as a percentage of gross domestic products (GDP) nearly 250%, the government needs to raise revenue where it can. Since the increase consumers have struggled resulting in a significant disagreement within the government as to whether a further scheduled 2017 increase should be cancelled. A decision likely to be made before the end of 2016, is whether the economy can withstand another increase in tax next year based on the situation of the economy. Consumer spending in 2016 will therefore be closely watched as to determine the policy decision to follow in the future.

The Japanese Yen Value  

Japanese manufacturing companies competes directly with Korean, Taiwanese and Chinese companies and the value of the yen is a significant factor in the price competitiveness of their products. A weaker yen has made Japanese products more compelling overseas such that profits earned in U.S. dollars or euros convert back into greater amounts of yen boosts locally denominated profits. The value of the yen has declined approximately 30% since 2012, which has been a boom for corporate organizations. But this come with a cost, being a major importing country particularly on food and energy a reduced buying power for Japan's many imported goods is not all good. While higher prices for imported goods will help support inflation, higher prices can also have a terrifying effect on demand.
These issues made the Bank of Japan derive policies that would strike a careful balance between a yen level that is weak enough for Japanese manufacturers but not so weak that it impedes on consumer demand. Much so the Federal Reserve's commencement of a rate hiking cycle only complicates this task this effort.

The Abenomics

Modern economies are not meant to suffer a prolonged periods of inadequate demand. Just have the Bank of Japan increase the money supply, or have the government spend more. Why then, is there a long years of low demand reaching more than half a decade. While the Japanese consumers traditionally is known to consume a low fraction of their income, companies must correspondingly be persuaded to maintain a high investment rate if the economy is not to have too little demand. The problem is aggravated because the troubles of the banking system have restricted the flow of credit so as to push demand Notably the Abenomics policy has already delivered some meaningful reforms. Of note are liberalization of the electricity industry, participation in the Trans-Pacific Partnership and implementation of changes in corporate governance. Critics maintain there is much more to do, particularly in the areas of labor regulation and immigration. Because of Japan's graying demographic profile and enormous national debt, time is growing short. 2016 will be a critical year to determine if the economy in the Land of the Rising Sun can rise again.

The year 2016, will therefore determine the extent of Japan's economic recovery effort.

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