Prime Minister Shinzo Abe is slowly running out of options to get his economy which is in permanent recession. The discussion between the professor and the student follows
Student: Professor, what seems to be the problem in Japan? Their GDP is struck around 5 trillion US $ for the last 15 or so years.
Professor: No, growth literally due to the host of problems. First is the issue of ageing population. Because the workforce is shrinking, by 0.5 percent, a year, nearly all growth must come from productivity gains. Labour is a serious problem here. How do you augment the workforce? Japan must persuade women and pensioners to get back to the job. First the Japanese government is not enthusiastic about bringing more immigrants. With nearly 40 percent of the labor in the low paid jobs is not the cure all for the situation. Without action in this regard, the GDP growth rate will be around 0.5 to 1 percent. Second, Abe decided to pump the prime and wanted to double the monetary base with an inflation target of 2 percent. Last year Japan spent 110 bln dollars extra and this nudged the economy growth rate past 1.5 percent. But he also increased consumption tax from 5 to 8 percent and this is pushing the economy back into recession. The announcement of tax increase pushed the consumer to do front load purchase and this helped the GDP to grow by 6.7 percent in the first quarter. But it has since run out of steam. Third Japan decided to lower the corporate tax to 35 percent. This is to attract new investment which is not happening immediately. We need to wait and see. Fourth Japan has loosened rules for agriculture land ownership by breaking the stranglehold of the agricultural co-operative. So you see any government can go so far to revive the economy but the ball is currently in the consumer’s court. Will the Japanese change his or her life style and start spending to push up the economy? It remains to be seen.
Student: You think the government policies will work?
Professor: Hard to say. Pumping the prime pushed the yen from 78 to 104 to a dollar, a massive devaluation. The growth didn’t take off. They pumped in more money. The growth took off but started tapering off. They are trying hard to push the inflation up to get the economy out of recession. Having said that, Japan must accept now that it is a fully grown economy. They don’t spend much on defense probably that is where the solution is. Let us wait and see.
Student: Thanks Professor.