MODERN ECONOMY OF

JAPAN

The Year

2004

GDP growth

2.7%

Current account balance

18.6 trillion yen

Yen-dollar exchange rate

107.74

Consumer price index

100.3

Nikkei 225 Stock Average (YEN)

High

12,163.89

Low

10,365.4

Unemployment rate

4.6%

POLITICAL PROBLEMS



“The Japanese are content with the
status quo; they don’t want to change”
Paul Krugman in Nihon Keizai Shimbun,
January 3



Ruling coalitions have been based more
on simple desire of the parties to be in
government then on agreement over
policy. Furthermore, those coalitions
have been too short lived to accomplish
serious reform.



New hope – Prime Minister Junichiro
Koizumi.

YOUNG JAPANESE



Because of a combination of high and rising life expectancies and
low and falling birth rate Japan is approaching the peak of its
population ageing process at a faster rate than any other country.



The average age of marriage keeps rising, as does the percentage
of people who do not marry at all, along with the number of
married couples who have no children.



The average number of children born to a woman over her
lifetime (total fertility rate) has fallen below 1.4.



The feeling of “resignation” – a growing tendency toward putting
off the reforms of institutions and practices that will entail heavy
adjustment costs.



Rising unemployment rate among the young. They do not take
steady jobs and remain dependent on their parents. Difficult
situation for job-seeking high school graduates, of whom only
about 40% are able to line up jobs before leaving school. Even
worse situation for women graduating from universities.



The pension entitlement age is being raised from 60 to 65,
resulting in taking fewer new employees by companies.



Instead of steady job – part time employment.

PASSIVE REBELLION



Many young people are not paying
contributions to the national pension
programme because they do not trust
the system.



Young people are turning their backs on
political system by staying away from
polling stations on election day.

SURE SIGNS OF
RECOVERY



“The lost decade” – the time of excessive pessimism in economy of Japan. In
2004, it has already been 3 years since bottoming out of the economy in
January 2001 and the move to recovery began.



Primary force driving the recovery- the private sector, mainly through plant
and equipment investment and investment in research and development.



Enterprises have made restructuring progress, boosting the earnings of
listed companies to the highest level ever, which has improved balance
sheets and in turn increased share prices.



Improvement in Japanese Finances, which were no longer exerting such a
negative impact on the economy.



For the first time in a long time there has been a dramatic improvement in
consumer confidence, with consumers showing signs that they are
consuming more.



The recognition of the potential for Japan to co-exist alongside China. For
the first time in a decade Japan recorded a trade surplus with China in
February 2004. New strategy for Japanese companies – they reevaluated
their internal labour structure, strategically selecting to have some products
produced and processed in Japanese factories, and others overseen by
Chinese factories.



“The restoration of entrepreneurial spirit”

WISDOM ACQUIRED
FROM FAILURE



The average growth rate of the Japanese economy overall
ha recently stopped declining and has staged a moderate
rally.



The world was astonished by the sudden turning of the
tide of the Japanese economy that began just at the
beginning of the 1990s. That business expansion gave rise
to a perceived threat of Japan possessing overwhelming
power, while post-bubble recession caused concern about
being dragged into a great depression that could possibly
originate from a crisis in overly weakened Japan.



The economic bubble was the outcome of a combination of
two faults: inadequate policies and a failure in business
management from a microeconomic perspective. But
reflection on these two failings has been inadequate.
Rather, Japan now has a new trait of concealing its flaws
and putting off necessary corrective action.

PITFALLS OF SUCCESS IN TWO
ECONOMIC SUPERPOWERS



Among developed nations, the economic slowdowns in Japan and
Germany have been especially noteworthy. After defeat in World War II,
the two countries stunned the world when they achieved dramatic
postwar economic rehabilitation and successfully developed into
economic superpowers. Today, they seem to have learned nothing from
failure and to have experienced the “pitfalls of success”, denoting the
temptation to be content with their successful experiences of the past.



Germany has broadly solve the problem which over time they have fallen
into, while Japan entered the bubble economy and plunged into self-
conceit without discussing possible solution what to do with their
economy. As a result, Japan seems to have neglected to develop new
competitiveness in response to the structural changes in the global
economy.



When the Japanese bubble burst in 1991, the United State reached the
trough of an extended recession. That country later enjoyed its longest-
ever period of economic expansion. Finding themselves overtaken by
Japan in terms of industrial competitiveness, American companies
experienced a sense of crisis, reformed themselves and eagerly studied
and introduced overseas practices, including Japan’s kanban system. With
these efforts, they successfully emerged from the difficulties. Now Japan
is final showing its own signs of a revival in entrepreneurial spirit.

NEW FOCUS ON
INTELLECTUAL PROPERTY



Japan is embarking on a new course. Both the public and
private sectors have launched efforts to overcome the
prolonged stagnation of recent years by shifting from
manufacturing to intellectual property as the foundation for
the nation’s economic and social vitality in the twenty-first
century.



In July 2002 the government’s Strategic Council on
Intellectual Property releases its Intellectual Property
Policy Outline. This document set forth the goal of making
Japan an “intellectual property-based nation”.



The Koizumi administration is currently working an
revisions to Japan’s legal systems. One key aim of these
revisions is to simplify and streamline the legal process
with respect to intellectual property issues. It is clear,
though, that Japanese society still has a way to go before it
reaches a final consensus on ways to attain the goal of
making the country one “based on intellectual property”.

THE FUTURE OF ASIA:
„POSSIBILITY OF ASIAN-STYLE
DEVELOPMENT, PEACE MODEL”



China and other parts of Asia are embracing possibilities for further
development and the establishment of regional community in the 21

st

century. However, the development process is not a straight line. There are
uncertainties and risks involved, so strategic cooperation among Asian
countries is essential.



Asian economies have been expanding rapidly, particularly since mid-
1980’s, countries have been developing considerable mutual
dependencies, naturally creating a common regional identity among Asian
countries. Economic development is steering attention away from a past of
poverty and chaos to a future of potential prosperity in which everyone can
share. As Asian countries have shifted attitudes toward future-oriented
approaches, many regional conflicts have eased or disappeared.



As Asian-style security model may be being formed, in sharp contrast to
other regions where nations sought peace through political processes but
conflicts and wars between different ethnic groups and religions erupted
when the Cold War ended.



The Association of Southeast Asian Nation has added many members over
the years and has been transformed into a cooperative body for regional
services, investment and capital among member countries by 2020.



China’s surging growth is dominating recant international economic
discussion, but the country had been a great power of many
countries in its long history. According to the organization for
Economic Cooperation and Development, China accounted for an
overwhelming 29% of combined global gross domestic product in
1820. India followed in second place whit 16%, France was third
with 5,4%, and the U.S. was in ninth place with mere 1,8%.



To recovery its “two lost countries”, China released a plan to
quadruple GDP by 2020. A fourth generation of increasingly
unorthodox senior Communist Party officials seeking to retain
legitimacy by realizing economic development, and has accelerated
the speed of reform and opening the nation to the world. Since
sustained inward investment and secure export markets are critical
issues, China’s foreign policy will probably remain friendly to all
for some time to come.



The arrival of a new great power tends to stain international order.
However, it is important to smoothly integrate China into global
economy and political order.



In addition, there is great potential for development of Asia
including China, but it is not a straight path. Other countries do not
need to be threatened by China’s advancement. Instead, Japan and
international society need to realize that cooperation for controlling
regional uncertainties and critical situations is the way to establish
as Asian-style development model and security in the 21

st

century.

MAKING A COMEBACK



Japan is seeing a gradual revival of its production economy. At one
time, Japanese manufacturers, fearful of “missing the boat” so to
speak, began moving their plants offshore to China and other
overseas locations, which later gave way to grave concerns about
hollowing out of domestic manufacturing industry. However, in the
last year, many manufactures have altered the way in which they
divide operations between their Chinese bases and domestic
plants and have started to establish new models for the division of
labor.

PRODUCTION COME HOME

A number of reason have been given as to why Japanese companies
are now moving their production bases back to Japan; these
included:



The fact in Japan that manufacturers can work together with from
the developmental stages,



The fact that there is a very high and stable proprietary of skilled
workers in Japan



The fact that it is easier to guard proprietary technology in Japan,



The fact that the profit margin on sales in Japan is much greater
than that on goods produced overseas.

METI ANALYSIS

In May 2004, the Ministry of Economy, Trade and Industry (METI)
released its “White Paper on Production” (White Paper on Japan’s
Manufacturing Base). The white paper highlights the fact that the
Japanese manufacturing industry has regained its confidence and
that business practices have changed for the better. It was even
subtitled, “New challenges for Japan’s progressive manufacturing
industry and strengthening Japan’s manufacturing base.”

The white paper also makes the following points:



The Japanese manufacturing industry is in the process of
recovery with enterprise revenue and profits continuing to rise.



Company liabilities and excess equipment have been curbed
considerably, as Japan’s manufacturing base is upgraded in
readiness for renewed expansion.



The digital appliance sector is generating new demand. This new
demand will contribute to a ‘positive cycle’ where company
profits will generate new research and development investment
and plant and equipment investment.



The Japanese manufacturing industry has regained its
competitiveness.

THE CENTAL BANK PREPARES
FOR A COURSE CHANGE



The Japanese economy has finally exited the long slump that
began in 1991, when the speculative bubbles of the late
1980s began to collapse, and has entered a new phase of
growth. The government initially forecast real growth for
fiscal 2004 at 1,8%, but in late July it upgraded this to 3,5%.



Now that the economy is evidently back on track, market
participants at home and abroad are wondering when the
Bank of Japan will stop pursuing its unprecedented policy of
“quantitative easing”.



Traditionally the BOJ has relied on the official discount rate
as its primary policy tool, using it to nudge market interest
rates up or down. But a series of cuts in the discount rate
eventually reduced it all the way to 0,1% in September 2001.
Having lowered interest rates as far as it could, the bank
needed to find another way to free up credit and quantitative
easing was the desperate measure it came up with.

QUANTITATIVE EASING



Quantitative easing is a policy designed to keep the market
flush with funds, and it involves adjusting the amount of money
commercial banks have on deposit in their current accounts at
the BOJ.



In normal times a central bank adjust the price of

money(interest rate) so as to influence the lending policies of
banks, the capital investment plans of businesses, and the
purchases of homes by families, thereby regulating the
economy's overall level of activity. Once interest rates had been
driven down practically to zero, however, they ceased to be of
any use as means of making credit available more freely. This
was the first time Japan had experienced zero interest rates,
and it was a situation virtually without precedent anywhere
else either.



The BOJ, believing that monetary relaxation still needed to

go further, even though interest rates were down to practically
nothing, determined to go ahead with the unusual measure of
quantitative easing despite the risk entailed.

QUANTITATIVE EASING
CD.



Commercial banks hold some of their funds in current
accounts at the BOJ to meet reserve requirements and
to use as in instrument of payment, and the BOJ policy
involves augmenting these deposits beyond the level
needed for payment transactions. The Bank of Japan
has set the target for the outstanding balance of
current accounts in the ¥30 trillion-¥35 trillion range.
Since ¥5 trillion is said to be all that is ordinarily
needed for payment purposes, we can appreciate that
the target range set by central bank is at an
exceptionally high level.



Meanwhile, many financial experts are saying that

quantitative easing is nothing more than a placebo and
are worried that if the policy is left in place too long, it
will give rise to unmanageable inflation in the years to
come.

SEEKING AN EXIT
STRATEGY



The Governor of BOJ – Toshihiko Fukui reiterated the
BOJ's position that it will not be altering course until the
year-on-year rate of change in the core consumer price
index is zero or higher.



What specific criteria will BOJ apply in determining

whether deflation has been truly overcome?



Fukui explained that the central bank will want to be

satisfied in three respects.



Underlying tone of rising prices, as demonstrated by several
consecutive months of positive change in the core consumer
price index.



After positive figures show up in these year-on-year statistics, it
needs to be able to judge that there is very little risk of a future
return to deflation, and it will not act until a majority of its
Policy Board members forecast a positive rate of change.



Take into account other conditions, including the effect of
changing the bank's policy framework.

TAKING RISKS AND
MAKING PROFITS



In Fukui's speech, which bears the title “Significance of Efficient
Financial Services for the Japan's Economy” he urged further
managerial reform in financial institutions. After April 2005, if a bank
fails, the deposit insurance for any single customer will extend only up
to an amount of ¥10 million in principal and the interest thereon. He
emphasized that financial institutions need to help their customers out
in dealing with risks. The BOJ Governor called for the construction of
business models enabling banks to take on, unbundle, and transfer a
wide variety of risks, thereby supporting renewed economic
development from the financial side.



Fukui also commented on Prime Minister Koizumi Jun'ichiro's plans

for reforming postal savings and public pensions. On the plan to
privatize the postal savings and insurance system, he laid stress on
three conditions that need to be met from the perspective of the central
bank.



The privatized services need to be on an equal footing with existing commercial
banks;



The services need to have the adequate risk management and be able to earn a
profit;



The services need to be clearly insulated from the risks of non-financial
businesses;