How has Japan fared with its economies booms and slumps?
This investigation is based on stage 4 unit 1 of the Business and Economics
A-level course, What happens in booms and slumps?. The unit focuses how
people and businesses are affected by booms and slumps, why they continuously
appear and the governments role in helping to control these two events. The
investigation will therefore focus on Japan and the way booms and slumps affect
the Japanese businesses and people. To determine this the investigation will
focus on Japanese economic growth, inflation, unemployment rates, trade and
Government economic policies. It is true that in a boom there are large amounts of trade. High demand, high GDP, low unemployment and high inflation (more spending). In a slump the opposite is true.
Recession – High Unemployment, low wages, low demand
High Inflation – More spending, higher demand, higher prices, higher costs of production.
Low Inflation – Less spending, low demand, low costs of production.
Downward Multiplier Effect – This occurs when there is too much demand. Then when there is a slump a deficit occurs because of the surplus that might have occurred in the boom.
It is difficult to begin to analyse the Japanese economy since the information
about it is very mixed. On one hand we have the news that Japan is coming out
of a recession and in the other that Japan is going into one. The information released by the government assures us that Japan is improving its economic stability, while the media and world banks tell the opposite story.The Bank Of Japan is looking to ease its monetary policy (control of interest rates to control bank lending) and to fight the deflation by creating inflation. While on the other side we are being told that the unemployment rate is easing from an unprecedented 5.0% to 4.5%. So which one is true.
It is true that Japanese economy has improved, it has come out of its recession but it still faces several problems that may keep it from expanding, these are:
Consumer demand is still weak – Between the years 1989 and 1998 household savings have decreased from 7.6% to 7.1 per cent. This means people have started spending more but still in low quantities.
Unemployment in Japan is at around 4.9%. – Although temporary workers and one day contract workers have increased full time employees have been laid off more.
Corporations continue to restructure themselves. – The Japanese are adopting a more American industry. The relationship between workers and
employers and the management is changing. This change is also a factor to the
So what exactly pulled Japan out of its recession. One of the major factors is the low interest rate (montary policy) that encouraged people to save less
and spend more thereby creating demand. By creating demand they initiated the circular flow of income. What this means is that households had more money which they spent on products and because there was demand once again the factories started producing, this led to the need for workers and the workers were paid wages which could then be spent. The other reason is major Government intervention, through fiscal policy. Although this large spending by
the government to create aggregate demand to keep the economy alive worked, it has increased the countries national debt which has to be paid off and not only
that but this active implementation of fiscal policy has created a fiscal deficit. So
far the damage created by the fiscal deficit has been non-existent but because of
the increased debt public spending may later become strained especially if
interest rates increase and people stop spending money once again. Then where
will the government get the money from. This fiscal policy can serve also as a
mask over the economy because it is hard to estimate in how much trouble it
really is if artificial demand is created. The government has spent $1 trillion US
on their stimulus budget and $500 billion to help sustain their banking system.
Apart from the government intervention the recession has caused the
Japanese to rethink their whole management structure. This now means instead
of the rest of Europe trying to model themselves on Japan, Japan has