Japan’s economy reported
another round of recession as the country reported a prolong period of no
economic growth, or stagnation. The Bank of Japan said there will be no further
easing of monetary policy. The economy shrank almost 1% in the third quarter.
Despite the easing of monetary policy, consumers and businesses did not respond
by spending more, thus boosting GNP.
Slow growth in China and
dim prospects led to Japanese companies held back in spending. Consumer
confidence and the economic conditions did not help in the direction of
business spending. Despite the promises of the easing of monetary and fiscal
policies, the climate was quite the opposite, thus business investing was
reserved.
Stagnation is where an
economy grows below potential, and is at a point of recessionary gap. Inflation
may be low but unemployment is high. When an economy is at this point a government
has at its option to provide fiscal policies that would get the economy grow
above potential, and the central bank also has at its disposal, tools to
influence the money supply, and ultimately interest rates.
What has happened with
Japan is that Prime Minister Abe can to power at a point when Japan was at a
turmoil. In 2008 the Nikkei dropped more than 40% along with negative GDP
growth rates. This led to drastic reforms of the Japanese economy. When Abe
came to power in 2012, his economic policies called for drastic changes. These
were reforms in a more aggressive monetary policies, structural reforms and
proactive fiscal policies.
Although these policies were
implemented, or partial thereof, they did not brought the awaited changes.
During 2013 the bank of Japan implemented Quantitative Easing, and announced
the purchases of Japanese bonds. Its target was to reach an inflation rate of
2%. This is the single mandate that most central banks have. By purchasing
bonds, the central bank’s idea was to pump money into the banking system, thus
allowing commercial banks to increase lending, encourage investments, and thus
increase aggregate demand.
Although
these policies had an effect on government spending, (increasing infrastructure
spending on public schools and roads) it also increased borrowing, adding to
the surmounting public debt. The ratio of debt to GDP was 240%. Further
quantitative easing leads to a weak currency. This may be good for exporting
goods, but for Japan, which is a country that imports energy, a weaker yen may
have adverse effects, since it will have to pay more. Exports in 2014 grew only
4.9%.
