Japan's Current State And Recommendations

Contents

EXECUTIVE SUMMARY 1

CURRENT STATE OF ECONOMY 2

CHALLENGES AND PROSPECTS 3

POLICY RECOMMENDATIONS 4

GROUP APPENDIX 6

Executive Summary

Current State

• Japan has been showing positive growth since 2002 demonstrated by an average 2% rise in GDP every year.

• Exports and business investments form a large part of the GDP growth with key export nations as US and China.

• Japan has a high gross debt standing at 147% of its GDP.

• Inflation continues to maintain a nearly zero trend.

• The unemployment rate is about 3.8% in a tight labour market with sluggish wage growth.

Medium Term Challenges and Prospects

• Japan has a huge debt, a large aging population and an increasing wealth gap.

• A heavy reliance on export to US for growth and threat of China as a manufacturing competitor.

• A fluctuation in energy prices globally is a potential threat to the energy intensive manufacturing industries.

• Prospects include making the nation more attractive to FDI, introduction of immigration friendly policies and tapping the unexploited service industry.

Policy Recommendations

• Fiscal policy to target tax reforms by lowering corporation tax, increasing consumption tax and widening income tax base.

• Trade policy to target improving relations to promote export to South-East Asia and Europe.

• Privatisation and Deregulation in the industry to improve competition and labour reforms to increase flexibility, efficiency and skill in market.

Current State of Economy

Japan is currently witnessing a period of upward growth with a 2.1% rise in GDP in 2007. The main contribution to the GDP comes from the export side followed by the business investments while the government consumption and consumer spending are low. Exports and business investments showed a robust growth trend which is likely to continue. Investment in particular has been favoured by the nearly zero interest rate. Government spending has been stifled by a gross debt standing at 147% of the GDP. Consumer spending has been weak owing to a higher saving rate amongst the older population and lower income levels amongst the younger generation (Appendix 1).

Inflation for the past year continued to maintain a low trend and was nearly zero (Appendix 2). The various reasons for a persistent nearly zero inflation figure are deflationary gap, low inflation expectations by the consumers, persistent wage moderation, reduction in the pricing power due to global competitive pressures and differential regional growth.

The labour markets are tight and the wage growth is sluggish with more and more young lesser paid workforce replacing the older retiring expensive ones. The unemployment rate fell to about 3.8% and primarily attributed to the negative population growth.

Export for Japan is largely concentrated in the US and China while other countries like South Korea, Taiwan and Hong Kong have also been on its export map. The other south eastern nations’ requirements are mostly satisfied by China. Also, they view Japan in a negative light as the country who had invaded South-East Asia during the war time. The export industry is manufacturing oriented with a weak contribution from services sector. Japan is heavily dependent on import for its oil supplies with almost no in house production (Appendix 3).

Medium Term Challenges and Prospects

The current challenges faced by the economy are multi-fold. Firstly, it has a large aging population which along with its negative population growth rate has lead to a shortage of labour. The retiring higher paid workforce replaced by inexpensive young labours is creating a wealth gap in the society. This gap is further widened by the non regular workers who work at almost 40% of the regular worker wages and are being increasingly hired by firms due to global competitive pressure. Another contribution to this issue is the regional inequality because of which urban and export oriented regions are showing faster growth.

Secondly, Japan’s heavy reliance on export for economic growth and the likely US recession could stall the growth, US being its largest importer. The situation might further be aggravated by the rising threat of China as Japan’s manufacturing competitor. On the imports side, the volatile energy prices can have a detrimental impact on the cost of production in highly energy intensive manufacturing set up.

Also, the huge government debt is a growing concern. This will continue to impact government spending and impede the public welfare initiatives for the younger workforce as the large older population’s pension and other benefits would consume a higher proportion of government spend.

One the prospects side making Japan attractive to FDI can infuse a new lease of life in the economy. The zero percent interest rate along with cheap