Analysis of the Article

Question : What is the Economics Analysis of a Project? Answer : Introduction Japans economic performance has been fluctuating over the past few years. The last three years have seen the Bank of Japan (BOJ) ramp up stimulus programs with the aim of ending the recurring deflation, increasing investments, enhancing consumer spending and increasing the wage rates in the country. However, the misguidance of investors by government data have been a major barrier to efforts meant to boost the economy (Fujioka 2016). In addition, the fluctuating figures of economic performance underscore the uneven progress made in enhancing economic growth in the country. Regardless of the set banks, the government and the Bank of Japan has been working towards the eradication of the weaknesses in the economy. Initially, the BOJ adopted a negative interest rate strategy to encourage banks to lend more. This plan was expected to cause the inflation expectations in Japan to fall while the yen strengthened against other currencies. Recently, economists raised their concerns to the possibility that the country may fall into another recession within the next year. By and large, this recession is expected to the highest since the 2012 recession. (Fujioka 2016) As a result, businesses in Japan are worried that the economic situation in the country is headed towards the wrong direction (Ping Chan 2015). Sales and revenue forecasts by major companies are decreasing. Therefore, after three of years of Abenomics and record monetary stimulus from the Bank of Japan, the nations economy is still experiencing a roller-coaster cycle (Fujioka 2016). For this reason, this paper discusses the various moves undertaken the BOJ and the effects of Abenomics and fiscal and monetary policies in Japans economy. In addition, the article will highlight the various policies and techniques that have been undertaken by the Japanese government to improve economic conditions in the country. Reduced Growth The growth of Japans gross domestic product for the last three-quarters creates no sense of optimism for economic prosperity. Data shows that the annualized 2.2 percent growth in the GDP for the July-September period which is attributed to a 2 percent rise in exports. However, other components of the GDP such as consumer spending and investments did not improve (GDP Data 2016 It is noteworthy that GDP growth in the last financial period improved as compared to the April-June period by approximately 0.7 percent (Japans Economy 2015). This figure indicates a faster gain than the average predictions made by the private sector Unemployment. Unemployment remains a major problem in Japan. However, the level of unemployment has gone down by 3 percent. On a country-wide average, the number of job offers is 1.38 times greater than the number of job seekers. In the past years, the per-household wages were outpaced by price wages. However, these wages have been rising on a net basis as the workforce shortages increase and prices fall. Unfortunately, the consumer spending is still small and does not show signs of recovery. Therefore, the gains are not strong enough to stimulate a recovery in private consumption. The outcome of the weak consumer spending is that it causes a dip in the consumer prices into a negative territory Low Household Spending This year, personal consumption rose by only 0.1 percent from the previous period. In September, the per-household spending declined by 2.1 percent (Stiqlitz 2013). On the other hand, capital investment increased by only 0.03 percent. Likewise, domestic demand rose by a mere 0.1 percent with a 0.6 percent fall in imports (Stiqlitz 2013). By and large, household spending is a major indicator of private consumption. Economic Contractions The economy is expected to have a series of contractions and expansions in the coming financial periods (Fujioka 2016). Although data shows that Japans GDP rose by one percent in the third quarter, economists expect the economy to exhibit a decline in the fourth quarter GDP. Even so, others believe that the yen may appreciate in value to 90 per dollar within a half year of Donald Trumps election. As such, Trump's ideas of America first is expected to weaken the dollar. Mainly, the president-elect of the US campaigned on a policy platform with protectionism at its core. It entailed threats to disengage trade agreements and impose tariffs in the Asian countries Causes of the Problems The country has been experiencing reduced growth in GDP due to reduced external demand and diminishing productivity within the nation. As such, external demand is marred with uncertainties due to slowdowns in emerging economies. Also, the unpredictability of the US economic policies and trade under the incoming president Donald Trump may increase the uncertainties. Donald Trumps victory has increased the uncertainty over the prospects for the global economy, and this affects the economic conditions in the country. In addition, the Japanese consumers remain reluctant to spend (Household Spending 2016) due to great concerns over the effectiveness of the social security system in Japan. There is also the tendency of the younger generation to save for the thereby causing the consumer spending in the country to stagnate. Moreover, the big wage gaps between full-time workers and the growing ranks of part-time employees can be used to explain the stagnation of consumer spending. Impacts on the Society and Economy The fluctuations in the level of GDP growth in the country has led to uncertainties in the level of economic growth that the country will experience. In addition, it makes economic planning difficult. Mainly, this is because it is impossible to plan when the economic conditions and expected GDP keeps fluctuating. Additionally, a decline in the level of GDP in a country is associated negative effects on the consumer, business and investors behavior. It may also lead to a shrinking in the level of interest rates in the country. What is more, it is associated with an increase in the level of unemployment within the country. High level of unemployment negatively affects economic growth and development of the Japanese economy. As such, it has resulted in less overall spending. High level of unemployment implies that people have less money to spend and therefore the economy suffers consumer demand. Low demand causes companies to suffer from loss of business and may eventually cut down production by laying off some employees (Wage Hikes 2016). This, in turn, leads to increased unemployment and the level of spending drops even more. Thus, unemployment may create a cyclical problem in the Japanese economy. Policies Implemented by the Government Abenomics In early 2013, after a continuous period of stagnation in Japan, a comprehensive economic policy package was launched. The Prime Minister Shinzo Abe proposed this package with the intention of sustainably reviving the Japanese economy while at the same time maintaining fiscal discipline in the country. By and large, Abenomics seeks to correct the two decades of economic inefficiency by increasing government expenditure, increasing the countrys money supply, and creating reforms that make the Japanese economy more competitive. Through this policies, therefore, the hope is that the nation will recover from the lack of growth and deflation. Primarily, Abes program is founded on three key policy arrows whose objective relates to sustainable fiscal policy, aggressive monetary policy, and a growth strategy. Therefore, Abenomics integrates fiscal expansion, structural reform, and monetary policy. Its central goal is to increase the internal demand and GDP while raising the rate of inflation by 2 percent (GDP Data 2016). Predominantly, all these efforts are aimed at improving the countrys prospects by enhancing competition, cementing existing trade partnerships and reforming labor markets. The first arrow in Abes approach entails the printing of additional currency by the central bank. The monetary stimulus intended to make Japanese exports more affordable and attractive and create modest inflation within the country. From the diagram above, an increase in money supply in the economy stimulates an increase in the level of GDP in the country. It also causes an increase in the level of aggregate demand which increases from AD1 to AD2. In turn, this increases the price levels in the economy from P1 to P2. Essentially, the increase in prices denotes the level of induced inflation in Japan. For this reason, Abenomics manages to increase the level of GDP growth in the Japanese economy while inducing a favorable rate of inflation. Besides, BOJ injected liquidity into the economy, pushing interest rates into the negative territory with the intention of boosting investment and lending in the country (Japan 2014). Increasing the money supply causes the LM curve to shift to LM1. In turn, this increases the level of GDP in the economy. What is more, it reduces the level of interest rate, thereby encouraging lending and borrowing within the economy. With time, this leads to economic growth. Effects of Abenomics Fiscal Policy The second arrow involves an increase in the government spending program. Mainly, this fiscal strategy is aimed at stimulating demand in the country thereby enhancing growth. It focuses on building critical infrastructure projects such as earthquake resistant roads, tunnels, and bridges within Japan. In addition, the government is intended to spend more on the upgrade to the missile defense systems. The governments fiscal 2017 budget policy emphasizes on the role of fiscal spending to boost economic performance in the country. For this reason, the budget is expected to increase to 97 trillion yen in the following year (Stiqlitz 2013). Increasing government expenditure causes the IS curve to shift from its original position to IS1. Likewise, the equilibrium shifts From E to E1 where the IS curve intersects the LM curve. The policy also leads to an increase in nation income from OY1 to OY2. The rise in national income leads to an increase in the demand for money. Given a fixed supply of money in the economy, the demand raises the interest rates to OR1. The last arrow focuses on enacting reforms through a series of regulations to make businesses and industries in Japan more competitive. The proposed legislation aims at restructuring the utility and pharmaceutical sectors. The reforms include lessening the rules to allow firms to fire ineffective employees, something that was initially difficult from the legal perspective. Furthermore, the strategy will work towards the modernization of agriculture in the country to increase general productivity in the country (Stiqlitz 2013). The Progress and Success of Abenomics As at 2014, many people believed that Abenomics is associated with a lot stimulus and less regulation. It is a strategy that has increased inflation in the country more than economic growth (Jain, 2014). As such, the proposed stimulus measures are viewed as having little or no effect on boosting confidence or growth in the Japanese economy. The only desired effect that the fiscal and monetary stimulus had achieved at the time was increasing the inflation rate in the country. The inflation was helpful to the economy, as the Japanese economy had experienced decades of inflation prior to that. Exports remained sluggish than expected and wage increase was trolling behind the pace of inflation. However, since 2014, some progress have been achieved by the Abenomics approach. It is worth noting that the real GDP increased significantly during the period. In the fiscal years between 2012 and 2015, the country experienced an increase in real GDP from 520 trillion yen to 529 trillion yen (Hamada 2016). As a result, the nation experienced substantial growth due to the implementation of the Abenomics in Japan. Additionally, the annual corporate ordinary profits increased by a substantial amount in the same period. Specifically, these profits increased by approximately 20 trillion yen (Hamada 2016). The period also experienced a decline in the level of unemployment. As such, the rate of unemployment in Japan reduced by 0.9 percent between 2012 and 2015. What is more, the consumer price index improved from the negative 0.6 percent experienced in 2012 to approximately 1.0 percent in 2015 (Abenomics 2016). The Setbacks of Abenomics Although Abenomics strategy to increase the supply of money in the economy may have succeeded in depreciating the value of the yen against the dollar, it failed to achieve the desired effect in the economy. From the inception of Abenomics, the yen has consistently depreciated against US dollar. However, the exports remained sluggish. Initially, the expectation was that a cheaper currency would increase the level of exports from Japan. But, the main effect achieved was an increase in the price of Japans imported fuel bill. That is, the weaker yen worked to the disadvantage of Japan as the situation made imports more expensive as at 2014 (Ping Chan 2016). In the same year, the government imposed a 3 percent consumption tax hike. In 2014, the national consumption tax increased from 5 percent to 8 percent (McBride Xu 2016). The hike caused Japanese consumers to increase their private spending before the proposed act was enacted, thereby increasing the first quarter consumption. However, the second quarter experienced a massive decline in consumption demand. As a result, the decrease in consumption demand in the country led to a massive contraction in the GDP of Japan in the 2014 April-June quarter (DAmico 2016). What is more, the critiques of Abenomics argue that the policy approach has significant risks. While some believe that continued monetary easing could result in hyperinflation, others argue that the Abenomics approach will not be sufficient to reverse the high deflation rate in the nation. Furthermore, there is worry about the state of Japans national debt. McBride and Xu (2016) note that the current 11 trillion yen national debt has by far surpassed 254 percent of its current GDP. Besides, this has caught the attention of the International Monetary Fund which has repeatedly warned that the Japanese debt levels are unstainable. Furthermore, the implementation of negative interest rates by the BOJ and other major banks in the country is a relatively untested monetary policy tool. Therefore, this creates uncertainty as economists are unsure of the outcomes of the system (Pesek 2016). The BOJ decision was differential as there were worries that the policy could worsen the current economic conditions and damage the Japanese banking system. It is argued that negative rates may not improve the spending in the country but instead encourage hoarding of cash. Eventually, this may lead to increased deflationary conditions in the nation. In addition, there is a risk that the monetary and fiscal efforts could give the Japanese government an excuse to procrastinate structural reforms plans. According to the IMF, the lack of additional structural reforms in Japan may increase the risk of the nation falling back into a period of deflation and low economic growth (Extra Budgets 2016). What is more, it may spur a further deterioration in the fiscal conditions of the country and create an overreliance on monetary stimulus that may pose adverse effects for Japan. Conclusion The Japanese economy has been experiencing weak economic growth and deflation for decades. The economys performance has been fluctuating over the past few years since the introduction of the Abenomics economic stimulus. Abenomics aims at achieving continuous economic growth and reducing the levels of deflation in the country (Abenomics 2016). In addition, the approach intends on spurring higher wages for Japanese workers, increasing the level of consumer spending and investments in the country. The actions of the BOJ and the government have achieved progress since the inception of the program. The GDP has increased significantly through the period. In addition, the reported rate of unemployment has reduced. The consumer price index is also increasing over time. However, consumer spending remains low despite the governments and the BOJ efforts to improve it. It is, therefore, the role of the government to come up with strategies to improve the level of consumer spending and enhance sustained economic growth in Japan. 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