Japanese Economy Introduction PDF

Introduction to the Japanese Economy I Chun Chen Chapter 4 Economic Maturity and Slow down 1970s-1980s The causes of Japan’s slow down – The Domestic Side – The External Side The oil shocks in 1973-74 and 1979-80 Floating of major currencies...

Introduction to the Japanese Economy I Chun Chen Chapter 4 Economic Maturity and Slow down 1970s-1980s The causes of Japan’s slow down – The Domestic Side – The External Side The oil shocks in 1973-74 and 1979-80 Floating of major currencies Trade Friction with the US Domestic Side: The end of catching up 1. The income ratio between 2. Per capita income by Japan and the US in terms of PPP (purchasing power per capita GNP(actual dollars): parity): – In 1950, 1 to 14 - In 1965, surpassed Italy – In 1960, 1 to 6 - In 1975, surpassed Britain – In 1970, 1 to 2.5 - In mid-1970s, close to the – In 1980, 1 to 1.3 US, West Germany and – In 1990, 1 to 0.93 France. The end of catching up 3. Affordability of consumer durables Buy a new car( the basic model of Toyota Corrola) -In 1966, 10.7 months of average salary. -in 1974, 4 months of average salary. -in 1991, 2.4 months of average salary. The External Side: a. The oil shocks in 1973-74 and 1979-80 b. Floating of major currencies a. The oil shocks in 1973-74 and 1979-80 OPEC(the Organization of Petroleum Exporting Countries) decided to raise the price and reduced their export volume. The OECD countries (the Organization for Economic Co-operation and Development) depended heavily on imported oil with the average 67% of domestic use. à Japan’s foreign oil dependency rate is 99.7% The oil shock in Japan 1. Shortage – Because of expected price increasing, people panicked and thus hoarded daily necessities. Shortages spread to industrial inputs. The oil shock in Japan 2. Inflation – Wholesale prices and consumer prices surged beyond what could be explained only by the oil impact. However, in the early 1970s, uBOJ intervened foreign exchange market to support the dollars. uJapanese government adopted expansionary fiscal policy. The impact of oil shock in Japan Structural reform – The government tried to reduce energy consumption by Downsizing and closure of energy-intensive industries. Improvement of energy efficiency Compared with the first oil shock of 1973-74, the second oil shock of 1979-80 had a relatively minor impact on the Japanese economy. Stagflation Describing the simultaneous occurrence of recession and high inflation Cause or effect? Stagflation 1. Supply shock view àOil shock is the cause of stagflation. P, Price level P2 P1 Q, Quantity Q2 Q1 of output Cause or effect? Stagflation 2. The global monetarist viewà high inflation was caused by global monetary expansion – The breakdown of the Bretton Woods fixed exchange system – To prevent the appreciation of major currencies during 1971-73, the money supply was increased in all major countries. b. Floating of major currencies The Bretton Woods system (1944-71) was a dollar- based and US centered fixed exchange rate system. As the US, the center country, began to adopt an expansionary policy, global inflation emerged in the late 1960s. – An expansionary is a macroeconomic policy that seeks to encourage aggregate demand by expanding the money supply, lowering interest rates, increasing government spending or cutting taxes. Floating of major currencies In 1971, the US announced that the US dollars was no longer to be fixed to gold and began to float. – The Japan and European countries intervened to avoid the appreciation of their currencies. – In 1973, the world entered into an era of floating major currencies. Intervention of exchange rate In 1985, the group of 5(G5)-the US, the UK, west Germany, France and Japan jointly intervened to lower the overvalued dollars.àPlaza Accord. In 1987, the group of 7(G7)- G5 plus Italy and Canada, again intervened to stabilize the dollars.àLouvre Accord. Floating of major currencies Japanese Economy is vulnerable to the fluctuation of the yen/dollar exchange rate. – There is no yen zone in Asia – Most of Japan’s trade and all of its financial transactions are conducted in dollars. – Japan has accumulated a huge amount of dollar assets( US government bills and bonds). – The Japanese products contains high domestic value added. Hence, if the yen appreciated, the products was losing its competitiveness in the world. èhigh yen-induced recession Trade Friction with the US It began in 1960s, when Japan exported cheap textile products to the US and was forced to adopt “voluntary” export quotas on its textiles. … also on steel, TV, automobiles, video players…, and so on. In 1980s, except the pressure to export less, the US also began to demand that Japan buys more American goods. Trade Friction with the US The idea that the US trade deficit was caused by Japan’s trade surplus, and that its reduction required bilateral diplomatic negotiations. à was this correct? The hypothesis is as followed, 1. The trade tension rises between Japan and the US because of the US trade deficit with Japan becoming intolerable. So the US demands the yen must appreciated and Japan buys more and sells less to the US. Trade Friction with the US 2. This policy cannot solve the US trade deficit problem. The fundamental solution is to curb American consumption and encourage savings. 3. Japan should accepts more imports from developing countries and more foreign direct investment from abroad. It would give a impetus to Japan’s structure reform. Trade Friction with the US China has overtaken Japan as the largest trade surplus country. – The US demands the appreciation of Chinese dollar. Fiscal Expansion and consolidation – and expansion again In the mid to late 1970s, fiscal expansion to stimulate the economy was re-activated, financed by issuing government bonds. In the 1980s, there was fiscal consolidation. – Tighter budget and bold cutting expenditure In the late 1980s, expansionary fiscal and monetary policies were enacted. à the years 1987-90 are the period of the “bubble” economy.  Introduction to the Japanese Economy I Chun Chen Chapter 3 High Economic Growth period (1950s-1970s) Rationalized Macro economic management Industry Policy Global re-integration Social Change New stage 1) Market Mechanism was largely restored. New stage 2) Private international trade began. 3) Because of the Korean war, there was associated with global inflation. But inflation rate in japan is higher than world average. New stage 4) A new fixed exchange rate of 360 yen to the dollar. 5) Japan regained political independence 6) Japan had small amount of international reserve. International Reserve Definition: external assets that are readily available to and controlled by monetary authorities. – for meeting balance of payments financing needs, – for intervention in exchange markets to affect the currency exchange rate, and – for maintaining confidence in the currency and the economy The Challenge Japanese industrial inputs had become more expensive than the U.S.. This reduced the competitiveness of Japanese products. Improving productivity National Economic Goal in early 1950s Rationalization (Gorika)means improving productivity through investment in new technology and machinery and reorganizing production and management. è Against by Labor Unions National attention switched to economics In 1960, several labor disputes happened – The Miike(三池) Coal miner protestation The protestation of renewal of the Japan-US Security Treaty. à at 1960, the days of direct confrontation in ideology and politics were over. Government proposed the “ Income Doubling Plan” to switch national attention to Economics. Macroeconomic management Fiscal side: – The budget was generally sound and in surplus. Macroeconomic management Monetary Side: – Fixed exchange rate of 360 yen to the dollars( from 1949-1971) – Stop-go policy : To keep the fixed exchange rate. When the economy overheated, the Bank of Japan tightened the money by raising the interest rate and through reducing new loans  Overheated Economy means demand is larger than supply in the economy. Then, the import >the export. The imports surged, then the international reserve decreased. àJapanese Yen should be depreciated. However, to keep the exchange rate, the central bank could reduce the circulation of yen in the market by increasing the interest rate and reducing issuing the loans. Performance of Japanese Economy during 1951-1971 1. Nominal GDP rose by an average of 14.5% per year. 2. Real GDP rose by an average of 9.4% per year. 3. Nominal wage rose by an average of 10.2% per year. 4. Remarkably price stability: the wholesale price index (WPI) rose at an annual rate of 0.7%. 5. Consumer Price Index(CPI) rose 4.4% annually. MITI and industrial policy MITI: The ministry of International Trade and Industry was created in 1949. Later, in 2001, renamed to the Ministry of Economy, Trade and Industry. MITI played a role in Japanese industrialization, but economists still debate its importance. Q: Was high growth achieved because of MITI or despite it? The reason for the official intervention 1. Avoid the excess competition Strengthen the international competitiveness by eliminating the domestic excess competition and enlarging size of business àJapanese government required industries to agree on output cartel and accept corporate mergers and resorted to export quota allocation. Cartel: Group of firms or nations who attempt to control price or supply of a commodity (such as oil) through mutual restraint on production. Policies for restricting competition Antimonopoly Act was enacted in 1947 in order to preserve the condition, the dissolution of the Zaibatsu. Exemption from the application of the Antimonopoly Act – Depression cartel – Rationalization cartel – Resale price maintenance The reason for the official intervention 2. Infant industry promotion Temporary protection of an industry in which a country does not currently have a comparative advantage, in the hopes that it will thereby gain a comparative advantage in it over time. Industrial Promotion Measures Preferential taxes Low interest policy loans R&D assistance Building infrastructure…. Reintegration into the global economy Trade liberalization in the 1960s 1. Executed gradually and in a well planned manner à non-negotiable 2. Tariff reduction was closed linked with industrial promotion measures to strengthen competitiveness. à producers focused on improving efficiency. 3. The government used international commitments to avoid domestic political capture. à government provided support according to actual performance not connection. Competition and cooperation coexisted. Social transformation Life style changed Labor surplus turned into a labor shortage. Environmental destruction Politics