Intro Economy Ch5,6

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Questions and Answers

What was the average GDP growth rate during the period of 2001-2006?

1.5% (correct)

1.2%

-0.2%

1.4%

Which period had the highest average annual private investment growth percentage?

2008-2012

2013-2017

1998-2001

2001-2007 (correct)

During which period did the core inflation rate first become positive?

2008-2012

2006-2009

2013-2017 (correct)

2001-2007

What was the public debt level in 2012?

217 trillion Signup and view all the answers

How did the unemployment rate change from 2001 to 2006?

Decreased from 4.6 to 4.5 Signup and view all the answers

What is one of the main objectives of Abenomics?

Increasing the trend of potential growth Signup and view all the answers

Which of the following was cited as a reason for sluggish consumption?

Higher consumption taxes Signup and view all the answers

What policy measure is associated with reviving the economy's earning power?

Gradually lowering the corporate income tax Signup and view all the answers

Which factor is aimed at increasing the workforce according to the growth strategy?

Increasing tax exemptions for spouses Signup and view all the answers

What is a defense made by proponents of the tax hikes?

They are necessary for debt sustainability Signup and view all the answers

What major economic strategy is associated with Shinzo Abe's administration?

Abenomics Signup and view all the answers

What was the target inflation rate set by Abenomics?

2% Signup and view all the answers

Which component of Abenomics is characterized by increased government spending on infrastructure?

Fiscal Stimulus Signup and view all the answers

What aspect of the Japanese economy prompted the adoption of Abenomics?

Decreasing household consumption and investment Signup and view all the answers

What did the Bank of Japan introduce in 2016 as part of its monetary policy?

Negative interest rates Signup and view all the answers

What was the outcome of Abenomics in terms of inflation?

Failed to reach the 2% target Signup and view all the answers

What was one significant fiscal action taken by the Abe government in April 2014?

Raising the consumption tax rate from 5% to 8% Signup and view all the answers

How did the consumption tax rate change under Prime Minister Abe's administration?

Increased and then postponed twice Signup and view all the answers

What was a significant factor contributing to the banking crisis in Japan during 1997-1998?

Accumulation of non-performing loans Signup and view all the answers

What was one effect of the banks reducing risky assets to improve their BIS ratios?

Credit crunch leading to more bankruptcies Signup and view all the answers

During which period did the Japanese government prepare public money to address the bad debt issue?

Banking crisis period Signup and view all the answers

Which policy did the Bank of Japan adopt in response to the banking crisis?

Adopt a zero interest rate policy Signup and view all the answers

What was one of the main attempts in Japan during the Koizumi period from 2003-2007?

Pressure on banks to reduce non-performing loans Signup and view all the answers

What economic event in 2009 was attributed to the Japanese economy falling into recession?

Lehman’s shock Signup and view all the answers

What is a liquidity trap?

A scenario where money supply increases but does not stimulate demand Signup and view all the answers

Which of the following is NOT a reason why the economic issues persisted for a long time in Japan?

Banks eliminating bad debts effectively Signup and view all the answers

What was the primary cause of the asset bubble in Japan during the 1980s?

Bank deregulation and easy monetary policy Signup and view all the answers

What significant event occurred during the 'lost decades' in Japan following the asset bubble burst?

A banking crisis Signup and view all the answers

What was the effect of the Plaza Accord on the Japanese yen?

It led to the appreciation of the yen against the US dollar Signup and view all the answers

What was the average nominal GDP growth rate during the Abenomics period (2013-2017)?

2.1% Signup and view all the answers

What was a key characteristic of the banking crisis in Japan post-asset bubble?

High levels of bad debts due to risky loans Signup and view all the answers

Which of the following statements is true regarding Japan's labor productivity during the Abenomics period?

Labor productivity saw minimal increase. Signup and view all the answers

What was a consequence of the easy monetary policy in the late 1980s in Japan?

It contributed to the formation of the asset bubble. Signup and view all the answers

What demographic challenge is Japan currently facing that affects its economy?

Aging society with low birthrate Signup and view all the answers

What major economic policy did Mieno Yashishi implement upon becoming governor of the BOJ in December 1989?

Tightened money and raised interest rates Signup and view all the answers

What was the central feature of Japan's 'Lost Two Decades' period?

Very low growth rate and negative inflation rate Signup and view all the answers

Which amusement park is considered the only hugely successful one in Japan?

Tokyo Disneyland Signup and view all the answers

What significant economic event began in Japan in 1997?

An increase in consumption tax Signup and view all the answers

Which of the following was NOT a factor contributing to the banking crisis in Japan from 1997 to 2003?

Rapid foreign trade growth Signup and view all the answers

What impact did the 'negative wealth effect' have during the bubble burst period?

Decreased consumption and investment Signup and view all the answers

How did the economic situation affect individuals who owned land compared to those who did not?

Landowners became rich while non-owners faced challenges Signup and view all the answers

Which economic stimulus strategy was used by the government in 1992?

Pumped money into the stock market Signup and view all the answers

Study Notes

Introduction to the Japanese Economy

Japan's economy is a significant global player.
The economy is complex and has experienced various periods.

Abenomics

In 2012, the LDP (Liberty Democratic Party) regained power.
Shinzo Abe became Prime Minister for the longest tenure in Japanese history.
Abenomics comprises three components: aggressive monetary policy, flexible fiscal policy, and a growth strategy.
Aggressive monetary policy aims for a 2% inflation rate and increasing government bond purchases.
Flexible fiscal policy focuses on infrastructure spending.
The growth strategy prioritizes structural reforms and opening up closed markets.
This strategy is often referred to as the "three-arrow strategy".

Why Abenomics?

Exports are declining.
Household consumption and investment are decreasing.
Real wages are decreasing.
The debt-to-GDP ratio is increasing.

Macroeconomic Performance

A table showing data for inflation rate, unemployment rate, GDP growth rate, and Stock price index (Nikkei average) by period from 1998 - 2020.
A chart showing the growth of Japanese private consumption, credit to the private sector, real GDP and real wages over time.
Another chart showing Japan's Government Debt: % of nominal GDP from 1994 to 2022, showing a considerable increase.

Monetary Policy

The target is 2% inflation, aiming to end deflation which had lasted for 15 years.
Quantitative and qualitative easing (QQE) was introduced in 2013 by the BOJ (Bank of Japan) governor, Kuroda.
A negative interest rate was introduced in 2016 by the BOJ.
A chart showing changes in inflation rates over time.

Result

Abenomics succeeded in ending deflation.
Abenomics did not achieve the 2% inflation target.

Monetary Policy - Failure?

Monetary policy did increase aggregate demand, and improved the output gap but prices were unmoved in Japan largely due to its deflationary mindset.

Flexible Fiscal Policy

The Consumption tax rate was raised from 5% to 8% in 2014. The plan has been postponed twice, but in 2019, it increased to 10%.
The Abe government focused on infrastructure spending.
A chart shows the change in tax revenues (general account) over several years.

Evaluation

Some economists say the consumption tax increase delayed the economic recovery and hindered reaching the 2% inflation goal.
Others say it was necessary for future debt sustainability.

General Government Debt

A chart displays the general government debt as a percentage of GDP across various nations from 1995-2021.

Growth Strategy

The main goal is to increase the trend of potential growth while mitigating the impact of demographic decline and fiscal consolidation.
A key aspect is activating investment, maximizing potential, expanding new markets, and integrating into the global economy.
The strategy heavily relies on structural reforms and opening the closed markets.

Growth Strategy (Further Detail)

Reviving economic earning power - lowering corporate income taxes, restarting business-labor talks on wage increases.
Increasing the workforce - boosting tax exemptions for couples, improving after-school childcare facilities.
Reforming regulations - limiting the power of the Japanese agricultural organization ("JA").

Nikkei Index

A chart illustrating the movement of the Nikkei Index, highlighting periods around Prime Minister Abe's tenure.

Post Bubble Period - Lost Decades

This refers to the two decades after a significant asset bubble (1990s) and includes multiple events, like financial crises.
The period includes the asset bubble, the burst of the bubble, the banking crisis, Koizumi period, and the political chaos period.
The main problems included, the bursting of the asset bubble, the banking crisis that followed it, the Koizumi era and political chaos.

The Asset Bubble

Factors causing the asset bubble include bank deregulation and easy money policies (like the Plaza Accord and Louvre Accord) that initially increased US dollar depreciation but in turn triggered increased Japanese imports.
The yen appreciated significantly from ¥237 to ¥154 from 1985 to 1986.
Expansionary monetary policies were followed to address Japan's declining economy but contributed to a bubble.

The Cause of the Bubble

Bank deregulation, where tight regulations by the Ministry of Finance were removed, allowed banks to seek higher profits by taking on riskier customers which caused later difficulties.
Easy money in the late 1980s played a factor in causing the asset bubble via policies like the Plaza Accord and Louvre Accord.

The Plaza Accord of 1985

An agreement among leading world governments (the G5) to coordinate monetary policies to depreciate the US dollar against other currencies, such as the Japanese Yen.
The motivations behind the Accord were to address the sharp increase in the USD and the resulting increased Japanese imports into the US.

Yen Appreciation

The Yen increased in value from ¥237 (per dollar) to ¥154 (per dollar) between 1985 and 1986.

Expansionary Monetary Policy

Central banks use expansionary monetary policy to stimulate a declining economy.
In Japan, the BOJ lowered short term-interest rates and increased the money supply.

Louvre Accord of 1987

An agreement among leading world governments (the G7) to stabilize major currencies halting the depreciation of the USD against other currencies.
This policy created a contradiction in goals for Japanese monetary policy that sought to depreciate the yen to maintain competitiveness but was restrained by the Accord.

World Situation

Black Monday crash of 1987 saw a substantial drop in the Dow Jones Industrial Average..

Observed Phenomena

Several amusement parks and resort hotels were built but most were unsuccessful and many were forced to either close down or adapt to new ownership.
Increased inequality as property owners became very wealthy.
Over-building of office towers which remained largely empty.

The Burst of the Bubble

The Governor of the BOJ (Bank of Japan) Mieno Yashishi abruptly ended the expansionary monetary policy by raising interest rates tightening money supply.

Lost Two Decades

The major feature is low growth rate and negative inflation.
The period includes the Bubble Burst, the Banking Crisis of 1997-1998, the Koizumi Period (2003-2007), and the Political Chaos Period (2007-2012).

Banking Crisis (1997-1998)

Non-performing loans had accumulated during the bubble period, impacting Japan's banks.
Banks struggled to meet BIS (Bank for International Settlements) capital adequacy requirements.
The government responded with fiscal measures including providing public money and restructuring banks.
A vicious circle formed where attempts to improve BIS ratios increased credit crunch leading to more bankruptcies and worsening bank asset quality.

Koizumi Period (2003-2007)

The Koizumi government heavily focused on economic reforms. This included streamlining public works.
It also involved adjustments to medical fees and the privatization of the postal system.

Political Chaos Period (2007-2012)

The 2008 Lehman Shock in the US negatively impacted Japan causing a recession.
The demand from the US declined sharply, and the yen appreciated significantly.
Political instability impacted the economy.

Monetary Policy (Further Details)

Increasing the money supply involved buying untraditional assets through open market operations (like foreign, bank and corporate bonds, and mortgage bonds).
Inflation targeting was used to help change expectations about future inflation.
Yen depreciation improved Japan's competitiveness and stimulated domestic and foreign demands.

Liquidity Trap

A situation where expansion of the money supply doesn't translate to increased aggregate demand.

Fiscal Policy

Fiscal policy in Japan post 1990 had a progressively expansionary tone in response to weakening economic conditions.
Japan had the highest government debt to GDP ratio (192%) compared to other major industrial countries in 2016.
Critics argue that huge fiscal spending failed to revive the Japanese economy. (A graph visually represents Japan's government debt level over time relative to other major countries.)

Why It Remained Long

cyclical adjustments for overcapacity,
bad debts accumulated by banks,
outdated economy with policies of lifetime employment, seniority pay,
rapidly aging population,
the emergence of China and the subsequent decrease in Japanese manufacturing competitiveness. (Various graphs and charts provide visual support for this period's data.)

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Description

This quiz covers the key aspects of the Japanese economy, focusing on Abenomics and its impact. Learn about the strategies implemented since Shinzo Abe's tenure and the economic challenges faced by Japan. It's essential for understanding Japan's role in the global market.