12/14/2018 Japan—A Macroeconomics Perspective

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Japan—A Macroeconomics
Perspective
Aug 21, 2016 • Loic Merckel

J
apan has seemed unable to thwart its massive and sustained Note: This essay is an
macroeconomics performance deterioration markedly observed during the incomplete—due to
copyrights—replication of
last few decades (Vogel, 2013). Japan has a national debt of approximately 240
the macroeconomics
per cent of its GDP, swallowing nearly 25 per cent of its annual budget in interest assignment I submitted in
and principal repayments (BMI, 2016)—This is the highest level of debt among partial ful llment of the
the OECD countries (OECD, 2015). Fast aging population increases public requirements for the
Degree of MBA (Judge
spending and hinders potential growth (OECD, 2015). “The dependency ratio … is
Business School,
the highest among the OECD nations” (MarketLine, 2015, p. 3). University of Cambridge,
UK).
Having drawn a rather gloomy picture, Japan enjoys a high GDP per capita, a
high human development index, is technologically one of the most advanced countries in the world
(MarketLine, 2015) and owns massive external assets, and has been sustaining a substantial current
account surplus—which makes Japan a rare, if not a unique case given its exorbitant scal debt (BMI,
2016).

In the remaining of this report, we further discuss ve macroeconomics issues about Japan.

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12/14/2018 Japan—A Macroeconomics Perspective

Long-term Strengths and Weaknesses of the

Macroeconomy
Strengths
Japan has been maintaining for years a comfortable
current account surplus—with the exception of a few
anomalies (see Figure 1); and that surplus is
forecasted to be sustained in the long-term as
depicted in the report of BMI (2016, p. 13)’s Figure
labeled Current Account Balance Forecasts (2014–
2025). The main driver of this surplus is the steady
income account in ows generated by external
Figure 1: Japan's current account balance history (1985–
assets (BMI, 2016). Japan has accrued a
2016)—from tradingeconomics.com
considerable amount of external assets, e.g., the
Bank of Japan holds USD 1.25 trillion in reserves (BMI, 2016). “Japan’s net international investment
position has risen to 70% of GDP, which is among the highest in the world” (BMI, 2016, p. 14).

Another strength stems from its appealing technological landscape (MarketLine, 2015). Japan is the
home of numerous globally-renown high-tech companies in various key areas such as, e.g., telecom,
automotive, electronic or heavy engineering (MarketLine, 2015; BMI, 2016).

Weaknesses
The public debt has been steadily growing over the years to reach an alarmingly high level with a gross
debt neighboring 240 per cent of the GDP (150 per cent in net terms). More worrisome is the fact that
experts anticipate no drastic improvement on the long term, but only a gradual improvement (BMI, 2016)
as shown on the gure labeled Fiscal and Public Debt Forecasts, Gross Debt and Fiscal Balance (2007–
2025) of the BMI (2016, p. 12)’s report.

The rapidly ageing population constitutes another source of major concerns. The gure labeled Falling
Active Population Ratio Will Be a Major Drag on Savings, see BMI (2016, p. 19)’s report, presents the
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gloomy forecast of the demographic pro le, whereas the gure labeled Worst Demographics in the
Developed World (BMI, 2016, p. 20) shows that Japan has the worst demographic outlook among
developed countries. “The working-age population (15–64) is already falling by more than one million per
year and is projected to decline by 17% by 2030 and by nearly 40% by 2050” (OECD, 2015, p. 15). A direct
consequence is a shortage in labor force; a situation that could be addressed via fostering gender equality
and reforming immigration policy (OECD, 2015; BMI, 2016).

This demographic situation hinders the measures to address the massive debt, as social security
expenses are likely to further increase in the coming decades (BMI, 2016). The chart in the gure labeled
Social Security The Main Drain Government Spending Breakdown, FY2016 Budget of BMI (2016, p. 11)’s
report unambiguously shows that social security already constitutes by far the main expense, followed by
the debt; more than 55 per cent of the annual budget is allocated to these two related items.

Trade Position and Competitive Advantage

Trade position
Table 1: Japan: external indicators—extracted from
After recently experiencing a substantial trade (OECD, 2016, p. 171)

de cit, caused in large by the aftermath of the

Fukushima nuclear crisis (Soble, 2014), Japan has
managed to turn its trade balance again to positive
(Soble, 2014; BMI, 2016)—see Table 1. Japan is a
major energy importer (BMI, 2016), constituting
nearly 30 per cent of the total imports (‘Petroleum &
Products’ plus ‘LNG’ in the table labeled Main Import
and Exports of the BMI (2016, p. 14)’s report); the
imports, and consequently the trade balance, are
thus vastly in uenced by the prices of oil and gas—the recent low prices of those commodities helped in
the return to a positive balance (BMI, 2016).

Competitive advantage
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The main export products presented in the table

labeled Main Export and Import Partners of the BMI
(2016, p. 14)’s report gives an indication of the
competitive advantage of Japan. The automotive
industry represents more than 23 per cent of the
exports. Toyota, Honda, Nissan, Suzuki, Mazda,
Mitsubishi, Subaru, Daihatsu and Yamaha, for
example, are all worldwide renowned Japanese
rms. Japan has an edge in the electronic industry
too with numerous global companies such as the
like of Hitachi, NEC, Canon, Fujitsu, Panasonic,
Sharp, Sony, Toshiba, Seiko and many others.
However, Japan is rapidly losing ground in Figure 2: Trend of Japan's global market share from 1987
to 2007 in selected ICT hardware—extracted from (Vogel,
information and communication technology (ICT)
2013, p. 1)
hardware, one of its strongest competitive
strengths, which has been eroding at a staggering
pace (Vogel, 2013)—as illustrated by Figure 2. Japan is also strong in the chemical industry and does well
in the steel industry. Japan has a noticeable presence in the scienti c instrumentation realm as well.

Policy Options to Increase Net Exports

It is essential for Japan to increase net exports, as “Japan remains dependent on exports as a driver of
growth” (BMI, 2016, p. 8). Table 1 gives an estimation/short term forecast of the net exports (foreign
balance)1.

The yen’s buying power has markedly weakened since 2012 (OECD, 2015, g. 25). Although this has
certainly, to a certain measure, contributed to improving net exports—by reducing imports when
alternatives exist domestically, the shortage of energy due to the Fukushima nuclear crisis has been
pushing the need for importing oil and gas up (Japan’s main imports, see the table labeled Main Import

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and Exports of the BMI (2016, p. 14)’s report), negatively impacting the net exports, a phenomenon
exacerbated by the considerable depreciation of the yen.

In this section, we discuss possible tactics to increase Japan’s net exports2.

Depreciate the Yen

The yen has a oating exchange rate, an arti cial depreciation might constitute a way to increase net
exports given a favorable context—e.g., “ rms’ pricing strategies; the price elasticities of demand; and
rms having su cient capacity to expand production” (Kitson, 2016, p. 1).

The rst Abenomics’ arrow focused on drastic monetary easing and led to yen depreciation (OECD, 2015).
However, some observers report a rather deceptive result regarding the positive impact on net exports
(Soble, 2014; ECB, 2015; BMI, 2016). BMI (2016, p. 22) notes that:

[A]rti cially weakening a currency is only bene cial if the reduction in prices received for a country’s exports are more than
offset by an increase in export volumes, and the production of exports can be increased with no opportunity cost in
terms of reduced production of domestically focused goods. These conditions almost never hold, and in the case of
Japan, the weak yen policy has essentially just subsidised the rest of the world at the expense of the domestic economy.

It must be borne in mind that depreciation is a double-edge sword. On the one hand, it improves the
competitiveness of Japanese goods abroad; but on the other hand, it increases the cost of foreign
products in Japan. In particular, Japan must import a great deal of energy to compensate the shortage
engendered by the 2011 earthquake (see the table labeled Main Import and Exports of the BMI (2016, p.
14)’s report).

We could argue that we are observing a J curve effect (Kitson, 2016, pp. 14 & 15), and that the long-term
bene ts of the depreciation have yet to be observed. Depreciation alone might not be enough to noticeably
improve net exports. Reinforcing competitive advantages (increase exports) and drawing level with
“competitive disadvantages” (decrease imports) should help in leveraging the weaker yen.

The third arrow of the Abenomics attempts to achieve those challenging goals with a set of reforms, see
Table 3 of the OECD (OECD, 2015, p. 14)’s report. Those reforms should lead to the regain of somewhat

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eroded competitive advantages (Vogel, 2013), and foster exports.

Besides, Japan is actively addressing the energy crisis. Focus is set on renewable energy and e ciency so
as to lower the consumption (DeWit, 2015; OECD, 2015). On the shorter term, nuclear plans shutdowned
after the 2011 nuclear accident (OECD, 2015, p. 24) are being certi ed by new enhanced safety regulations
and restarted (Soble, 2014). These should have the effect of reducing energy imports.

Free trade agreements

Japanese rms with competitive advantage (see
section Trade Position and Competitive Advantage)
should gain from free trade agreements, and
consequently a surge in exports should follow.
Figure 3 depicts the current status. “Japan has
signed 15 Economic Partnership Agreements (EPAs)
since 2002, they cover less than a quarter of its
Figure 3: Japan, free trade agreement (FTA) and
trade” (OECD, 2015, p. 17) and has just signed the economic partnership agreement (EPA)—source:
Trans-Paci c Partnership agreement (OECD, 2016). mofa.go.jp
Furthermore, the Japan-EU and the Japan-China-
Korea free trade agreements are under negotiation (European Commission, 2016; OECD, 2016).

For instance, considering the EU-Japan Free Trade Agreement (European Commission, 2016), although a
narrowing trend is observed, Japan’s net export to EU remains positive—see the table titled Total goods:
EU Trade ows and balance, annual data 2005–2015 in the European Commission (2016, p. 3)’s report—
and thus it is reasonable to believe that voiding the tariff will accentuate this situation and thus improve
Japan’s net exports.

To optimize the bene ts brought about by those agreements and increase the odds of noticeably
improving net exports, it is wise to support tariff protected industries that might otherwise suffer from
those agreements (with the consequence of increasing imports, and consequently damaging net exports
—in addition to create other domestic problems). Agriculture is especially of concern, tariff on farm goods
(especially on rice) is the main nancing vehicle of the Producer Support Estimate (OECD, 2015), which

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“averaged 48% of gross farm receipts in 2013–15” (OECD, 2016), and “consumer spending on agricultural
products was 1.8 times what it would have been in the absence of government policies” (OECD, 2015, p.
17). The Abenomics’ third arrow’s ninth reform has been enacted speci cally to address this agricultural
issue—see Table 3, Reform 9 of the OECD (2015, p. 14)’s survey—and “aims to double the income of
farmers and farming communities within ten years and double exports by 2020” (OECD, 2015, p. 17).

Impact of the 2007–2008 Financial Crisis and the

World Economic Slowdown
It must be borne in mind that Japan, already in the
wake of the 2007–2008 nancial crisis (that rapidly
translated into an economic crisis), suffered a
second major economic crisis due to the
cataclysmic tsunami of 2011; and post 2011, Japan
must deal with the cumulative effects of those two
crises (the gure labeled Heading Lower, Industrial
Production Index of the BMI (BMI, 2016, p. 9)’s report
shows two corresponding dents). Although the
Japanese economy markedly contracted during the
2007–2008 nancial crisis, it only marginally
contracted during the tsunami-triggered crisis, as
depicted in Figure 4—also see the MarketLine (2015,
Figure 4: Japan GDP growth (2000–2016)—adapted from
p. 53)’s report. Furthermore, it is worth noting that
data.oecd.org
Japan was still showing weak economic
performance as a result of its 1991 nancial crisis (Bosworth, 2015).

At the onset of the nancial crisis in 2008, Japan enjoyed a brief respite from the domino effect that was
devastating other rich nations (Fackler, 2008; Vogel, 2013; Kawai & Takagi, 2009). But the crisis eventually
gravely hit Japan3 (Vollmer & Bebenroth, 2012).

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The gure labeled Heading Lower, Industrial Production Index of the BMI (BMI, 2016, p. 9)’s report shows
the industrial production index—which “measures the real production output of manufacturing, mining,
and utilities” (Wikipedia, 2016, para. 1)—and reveals that the industrial production has been being
remarkably poor since the two crises, suggesting that Japan is still struggling in the aftermath of those
crises.

Figure 4 depicts the long-term damages in icted by the crisis on the GDP.

Among the policy responses to recession by the government and the Bank of Japan (Vollmer & Bebenroth,
2012), SMEs (99.7 per cent of the registered rms) have been substantially supported by the government
helping them to face the crisis down. The number of bankruptcies has noticeably decreased in Japan
since (and during) the two crises (considering the 2011 earthquake), while “bankruptcies increased by an
average of 66% in OECD countries over 2007–12” (OECD, 2015, p. 23). However, excessive SMEs support
has long-term negative effects for the economy such as hampering the development of market-based
nancing, keeping undesirable “zombie” rms alive and discouraging rms from expanding. The
government should now address those issues by revising its support scheme to SMEs before the burden
becomes unbearable (OECD, 2015, p. 23).

Possible Impacts on the Economy if Greece Decides

to Withdraw from the Eurozone
A Grexit would most certainly lead to a collapse of the Greek economy with the introduction of a new
currency that is expected to rapidly and signi cantly depreciate (Mercier, 2015; Ernst & Young, 2015). As a
direct result, the long-standing trade surplus of Japan would turn to a trade de cit. However, considering
the rather minimal level of trade between these two countries (MOFA of Japan, 2016), the implication for
the Japanese economy should remain barely noticeable.

There are Japanese corporations established in Greece (MOFA of Japan, 2016); those rms might be
exposed to various accounting and tax risks as discussed by Ernst & Young (2015). However, due to the
small number of concerned rms, it seems unlikely that perceptible repercussions on the Japanese
economy would subsequently occur.
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Greece would probably default on its colossal national debt after a Grexit (Mercier, 2015). The debt is held
mostly by the ECB, the IMF and other European countries (Mercier, 2015; Kottasova, 2015). Those
European countries would somewhat suffer from losses, with some impact on their economy. Besides,
the entire Eurozone economic climate would be shrouded into vast uncertainty and fear; e.g., it would
“reintroduce underlying convertibility risk, reviving nancial fragmentation within the monetary union” and
“the integrity of the euro zone would come under fresh threat with each episode of political uncertainty
within member countries” (Mercier, 2015, p. 4). Consequently, the euro would be gravely struck and its
value against the yen would likely plummet; which would dramatically impact trades between Japan and
the entire Eurozone, leading to a drop in the Japanese exports to the EU, causing a serious blow to the
Japanese economy that relies on those exports—EU 28 constitutes the third export destination, with 10.6
per cent of its total exports; see the table Total Goods: Top trading partners 2015 of the European
Commission (2016, p. 8)’s report.

The recent Brexit referendum had led to a surge of the yen with various worrisome consequences for
Japan (Nagata, 2016). It is reasonable to speculate that a Grexit would trigger a similar upheaval. ■

References
1. BMI. (2016). Japan Country Risk Report - Q2 2016. Retrieved from http://goo.gl/ojGjRR
2. Bosworth, B. P. (2015). Impact of the Financial Crisis on Long-Term Growth. Center for Retirement
Research at Boston College. Retrieved from http://goo.gl/9nujmQ
3. DeWit, A. (2015). Japan’s Bid to Become a World Leader in Renewable Energy. The Asia-Paci c Journal
| Japan Focus, 13(39).
4. ECB. (2015). Japan’s recent net export performance. Economic Bulletin, (3).
5. Fackler, M. (2008). In Japan, Financial Crisis Is Just a Ripple. The New York Times. Retrieved from
http://nyti.ms/1QArRP4
6. Kawai, M., & Takagi, S. (2009). Why was Japan Hit So Hard by the Global Financial Crisis? Asian
Development Bank Institute, (153). Retrieved from http://goo.gl/WzZ7uw
7. Kitson, M. (2016). Macroeconomics—Brie ng notes for cycle 2 part 3.
8. Kitson, M. (2016). Macroeconomics—Classic Macroeconomic Issues - Exchange Rates, (slides).

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9. Kottasova, I. (2015). Greek debt crisis: Who has most to lose? Retrieved from http://goo.gl/cLBVI1
10. MarketLine. (2015). Japan, In-depth PESTLE insights, (ML00002-018/Published 09/2015).
11. Mercier, T. (2015). Grexit: Lose-Lose. Flash Recherche, Recherche Economique Groupe—BNP Paribas,
(14–15). Retrieved from http://goo.gl/zpkwHF
12. Nagata, K. (2016). Yen leaps on referendum surprise; Nikkei tumbles. The Japan Times. Retrieved
from http://goo.gl/uvervV
13. OECD. (2015). OECD Economic Surveys JAPAN. Retrieved from http://goo.gl/XUDKLw
14. OECD. (2016). OECD Economic Outlook, Volume 2016 Issue 1. Retrieved from http://goo.gl/ToAhij
15. OECD. (2016). Producer and Consumer Support Estimates database. Retrieved from
http://goo.gl/xp9HYL
16. Soble, J. (2014). Japan’s record trade de cit raises fresh doubts about Abenomics. Financial Times.
Retrieved from http://on.ft.com/1z6ExWM
17. Soble, J. (2014). Japan trade de cit narrows as exports rise. Financial Times. Retrieved from
http://on.ft.com/1AyjtZZ
18. Vogel, S. K. (2013). What Ever Happened to Japanese Electronics?: A World Economy Perspective.
The Asia-Paci c Journal | Japan Focus, 11(45).
19. Vogel, S. K. (2013). Japan’s Information Technology Challenge. In D. Breznitz & J. Zysman (Eds.), The
Third Globalization: Can Wealthy Nations Stay Rich in the Twenty-First Century? (pp. 350–371). Oxford
University Press.
20. Vollmer, U., & Bebenroth, R. (2012). The Financial Crisis in Japan: Causes and Policy Reactions by the
Bank of Japan. The European Journal of Comparative Economics, 9(1), 51–77.
21. Wikipedia. (2016). Industrial production index—Wikipedia, The Free Encyclopedia. Retrieved from
https://goo.gl/O0gish
22. Ernst & Young. (2015). Potential tax risks from a Greece exit of the Euro. Japan Tax Alert—Ernst &
Young Tax Co. Retrieved from http://goo.gl/aqovoc
23. European Commission. (2016). Japan - Trade. Retrieved from http://goo.gl/B4ELzo
24. European Commission. (2016). European Union, Trade in goods with Japan. Retrieved from
http://goo.gl/uC3Hd4
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Retrieved from http://goo.gl/lh0zfz

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1. Other observers believe that the net exports will remain negative and even deteriorate on the long
term, see, e.g., the table labeled Net Exports Forecasts from the BMI (2016, p. 10)’s report. ↩
2. Since 2012 the so-called Abenomics (Wikipedia, 2016) has been attempting to boost growth (the third
arrow), and therefore Japan has been/is already implementing measures towards improving net
exports (OECD, 2015); meaning that we can already observe some preliminary results of some policy
options. ↩
3. Kawai and Takagi (2009) attempt to explain some of the factors that made the crisis especially
painful for Japan. ↩

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