The Future of Japans Economy

The Future of japans EconomyWhere will lacquer be in 20 years?SUMMARY long economic prognosticate is still as difficult as ever. Typical previous long-term medical prognosiss have proved to be on average forth by as much as 33%. In the expose day unsettled political and economic climate forecasting economic prospective of a country has become even more difficult. lacquers economy declined during 1998-2003 period, making the economic pundits wonder if japan would be sufficient to raise its economy. Signifi piece of asst appendage during the last twain years shows that Japans economy cannot be written saturnine that easily.Japan has many economic factors reenforcement the likely hood of Japans continued economic growth everyplace the adjoining 20 years. On the other hand emergence of china as the third largest economic power, its increasing sh are in world economy, Japans declining working race, huge home(prenominal) debt, rising energy prices and precarious world politics could jeopardize the economic growth.Japan need to modify its tax structure and reduce the burden of debts. Recent elections over the decision on privatization of the postal system shows that Japan is prepared to make tough decisions to keep its economy on track.It appears that Japan is already preparing to be a part of the supremacy of the bare-assly emerging economic superpowers. The inter-dependence of the economies will ensure that Japan will continue to make economic progress. An economic cultivation rate of 1.8% over the future(a) 20 years appears to be certainly achiev equal to(p) for Japan.INTRODUCTIONThe post war years solelyowed Japan to concentrate on economic development. With nearly no defense expenditure, Japan was able to devote nearly one third of its GNP to investments during 1953-63 Angus Madison, 2005. The government policies of investment in education, pains and research and development started intent fruit and the average yearbook growth rate du ring 1960s remained around 11% per annum.The government policies favored encouraging savings, promoting investments, supporting newly emerging industry and promoting exports. Between 1965 and 1970 average growth rate was 11.1% (Financial statistics of Japan, Ministry of Finance, 2005)gross domestic product Growth in real terms**GDP Growth %1960 8.81965 9.21970 11.11975 4.51980 2.8The steady growth rate of closely 10% per annum helped Japan overtake Federal Republic of Germany in terms of GNP by 1968 to become 2nd only to United States of America. The 1973 petroleum crisis came as an economic shock to Japan. The second oil price increase of 1979 meant that the oil prices which were around $12.75 a barrel in 1974 increased nearly by ccc% to $34 a barrel in 1981 Nakamura, 2005. Japan, being al close to totally dependent on imported oil reacted quickly by adopting a policy of monetary constraints and improved its energy efficiency to stay competitive and the decline in exports in 1980 -2 were recovered by 1984 proving that Japan has the ability to bounce back.The two decades following the Japans meteoric muster up were the years of globalization. 1980-2000 were the years when the economic development suffered a slow down all over the world. Weisbrot et al, 2001 think it the period of diminished progress. The 2nd oil price increase of 1979, globalization and flow of capital to third world countries and economic mismanagement have all been blamed for the decline Weisbrot et al, 2001. The IMF figures of real per capita GDP (in constant 2000 US$) shows that when compared to 1960-80, almost in all cases per capita GDP declined during the two decades 0f 1980-2000. For the top GDP bracket (which includes Japan), the annual rate of GDP growth fell by 1%.Reference Weisbrot et al, 2001In this global period of economic decline, Japans economic withal went through a period of recession. When everyone was expanding Japan to continue the economic miracle, Japans economy had to face a number of financial crises, nearly of which in the hindsight appear to be of their own making. Agarwal, 2004 believes that the liberalization of financial system, the deregulation of banking sector, interests and capital flows were carried go forth without proper assessment of their impact on the domestic financial markets. galore(postnominal) financial institutions came to the verge of bankruptcy and most of these had to be bailed out to prevent an economic crisis.Some analysts in Agarwal Agarwal, 2001 believe that unlike United States which stepped into to save the economy from savings and Loan, Japans Ministry of Finance failure to intervene and making the financial institutions sell their assets to account for hundreds of billion dollars worth of non performing loans is responsible for the economic crisis of Japan during the mid-nineties.In addition to the financial problems and banking sector near insolvency, the economic experts identified Weak economic activity, low productivity and high prices as more or less of the reasons for stagnation of economy. Japans dwindling working age people means that there will be fewer workers available for economic activity.The domestic financial policies, a reducing in exports collectible to a global economic down trend resulted in an average growth rate of 1.7% during 1990s CIA sparing Report, 2005. In the aftermath of September 11 crisis, the slowing down of US, European and Asian economies has not helped the export establish Japanese economy and during 2000-3 Japans economy stagnated during this period.During the first half of 2004 Japans economy began to show the sign of recovery. It was the first time that the economic figure gave reason for optimism for Japans economy during almost a decade Japan declared a growth rate of 5.25% (seasonally adjusted annual figure). This figure was largely collect to the new economic factors presentlyadays emerging in the world economy, the fast festering Chin ese economy. Slower growth in domestic machinery demand and reduction in orders from mainland chinaware resulted in an overall growth rate of 2.25%. Suddenly the economic pundits have become extremely optimistic about Japans economic growth in the forthcoming years. The earlier estimates of 3.4% growth for 2005 have now been upgraded by International Monetary Fund (IMF) to 4.5% IMF Predicts, 2005.Economics believe that due to pressures of being a democracy, Japan chose not to make hard choices the banks were forced to hide the non recoverable loans and were obliged to throw good money after sorry to appear to be solvent. The government borrowed heavily from the public and now the debt stands at 160% of GDP CIA Economic Report, 2005. Japan opted to ignore the option of writing off bad debts and using inflation to overcome the problem and used monetary tactics of accumulation of capital, which to most economist has cost them a longer than pass judgment period of economic decline. T he position now is that the banks are in a strong financial position and are generally solvent. The economic recovery from now on can be expected to be on a sound footing Jerram, 2004.ECONOMIC FORECASTINGThe science (or Art) of forecasting the economic future tense of a country especially a long term forecast is still an uncertain art. The parameters required for the input can and do change over the forecast period. Artis, 1996 analyzed the economic forecasts error in pre-1983 and post-1983 period to show that the forecasting has not significantly improved during the two periods. While the economic parameters for most of the developing countries are not available in the required detail, for the developed countries it is normally not a major problem, yet the accuracy of the forecast varies by about 1% which is almost 30% out when we recognize that actual growth rate is around 2.75% The difficult Art of predict, 1996. It has to be appreciated that some of the factors involved in eco nomic growth are so unpredictable that they cannot be possibly included in economic forecasting, factors such as oil price shocks, unification of two Germany, September 11 terrorist attack, natural disasters like floods in New Orleans and Kashmir earthquakes cannot be factored into economic forecasts. The error of 1% in predicting economic trends is an average, in many cases IMF and OECD have been quite accurate in their predictions and the economic forecasting continues to have the confidence of economic planners to use it as a basis of international business as well as for providing planning information to the national economies.METHODOLOGIES OF ECONOMIC FORECASTINGClements and Henry, 2002 and Mizon, 2002 present excellent reviews of economic forecasting techniques. Clements and Henry, 2002 give a detailed explanation of statistical modeling and techniques for generating forecasts. Reasons for errors in macroeconomic forecasts are also covered as also are methods of evaluating for ecasts generated by different methods. The reasons for forecast failure are explained in a non-technical language by Hendry Ericsson, 2001.Arsham, 2005 is an excellent reference manual available online for economic forecast modeling. The Forecasting method covered by Arsham, 2005 include Economic Indicators, Economic Projections, Compound Growth Rate, Time Series Projection, Time Series using Ordinary least Square (OLS) Method, Visual Time Series Projections, Forecasting with Smoothing Techniques and Forecasting with Econometric Models.japan ECONOMY IN 20 YEARSJapans economy has overcome the difficulties of the last decade. The growth rate from 2004 is expected to be a healthy 3%. In 2004 Japan achieved a growth rate of 2.25%. The IMF forecast for 2005 and 2006 is an economic growth rate of 4.5%. The worse appears to be over but for future economic growth, Japan has to ensure that its national debt is reduced, the impact of demographic factors is minimize and its exports and overse as turnout interest are maintained.DEMOGRAPHIC FACTORSOne of the major factors being identified as potential hazard to future economic development of Japan is its aging population. Japan has an excellent health care system. The life expectancy in Japan is among one of the highest in the developing countries. According to the population statistics 20% of Japans population is now 65 years or over.The problem is that the Japans population is not being replenished by the new births at the required rate. The fertility rate has dropped to 1.3 children per woman which is well below the replacement level. The concern that Japans economy weakened by the recession of more than a decade may be overburdened by the problems of manpower deficit, paying old age benefits to the high percentage of aged citizens. The labor force is likely to shrink by 0.7% Campbell, 2003 a year between 2000 and 2025 and may well seriously effect the economic development during the next 20 years. The problem is tha t the life style Japanese have got accustomed to does not encourage child bearing to have the hope of making up the present shortfall in foreseeable future. A survey of Japanese women showed that only 7% of Japanese women saw child bearing is a congenial experience compared to 60-70% women in other countries Campbell, 2003. This means that Japans population is likely to continue its trend of declining working age group and an increasing population of 65 years and over.The fiscal implication of the aging population would require a change in the pension system. The present system of pay-as-you-go would mean that keen aging effect on public finances for 2000 to 2030 could be debt equal to 190% of 2000 GDP The United Nation Population Development calculations estimate that if the present situation does not improve, by 2025 Japan will have an average age of 50 years. The population of 65 years and over will be 30% of the total population. The NUPD paints a bleak picture where due to d ecline in birth rate the proportion of children under 15 will be the same as those of people 80 years and over. This is stark statistics indeed and there is no doubt that Japan will have to take move to encourage population growth rate to around 3% per annum. However, most social scientists believe that this doom day forecast can be avoided. In the near term Campbell argues that the gradual decline rate of 0.7% is manageable and the economy can cope with this without undue strain.Campbell contends that older people will not be a burden on state, the pension premium for the working population may have to be increased to support the pension schemes but it is incredible to impede the economy. He points out that United States spend 13% of GDP on health care while Japan spent 7.8% for providing a break in degree of health care to its population.Usui believes that women are still not participating in the economy to the extent they could and in case of labor shortage they would f ly the coop a more active role in the labor market to remove the labor shortage. She also points out to the useful role senior citizens bid in upbringing of their grand children releasing parents for a more active economic role. The population growth rates can thus be achieved without removing women from the workforce for an extended period.The demographic dilemma is certainly a cause for concern for Japans economy but it appears that Japan will be able to cope with the shortage during the next 20 years. Japan has not been very receptive to the guest workers for run into its manpower requirements but a future shortage may change that situation. Increased productivity, late retirement, more participant of women in work force and possibility of using foreign workers are some of the options that can be used to meet the manpower requirement of the economy. Japan has the highest number of robots in use in the world CIA Report on Japan Economy, 2005, the mechanization is another solut ion to the manpower shortage.However, the real solution in the long term is to encourage population growth through incentives and child support. Negative population growth is a problem in many developed countries and solutions are being found to prevent it from holding the economic development.CHINA AS AN locomotive engine FOR JAPANS ECONOMYJapans economic miracle was greatly helped by the exports to United States. As Japans economy developed it was able to find additional partners in Middle East, Europe and in developing countries. The global economic decline during 1980-2000 reduced the pace of economic development in Japan. Chinas economic miracle during the last few years has been largely responsible for the revival of Japans economy.India is also posting impressive economic growth rate during the last few years. Japans technological advantage, its competitiveness and its participation in ASEAN places Japan in an advantageous position in helping develop these economies News Ite m, 2004. The recent revival of Japans economy has in part been attributed to its exports to China. At present the main exports to China are of sophisticated parts. Many of the Japans giant corporations are building new facilities in Japan to make products for China and other markets.China has made tremendous progress since a change in its political system. Its foreign trade has grown by double digits for many years. China is now the third largest occupation country in the world and its exports to United States were around $150 billion last year putting China frontwards of Japan in the inclination of countries exporting to USA Herman, 2005. Many observers believe that this baron be a threat to Japans economy. But China and Japan, at least for now see this as a window of luck for developing their economies. China needs Japans technology and Japan recognizes China as an opportunity to reduce its production cost by using cheap labor available in China.China will perhaps welcome Ja pans investment even more than investment from US as Japanese investment does not come with a dose of speeches urging China to crystallize its political system China is encouraging direct investment from developed countries and Japan has already built plants in Japan to lower its labor be and stay competitive in the international markets. Japan-China cooperation in the economic filed appears to be in the interest of both countries. China has an advantage in labor costs and for the foreseeable future China will need the advance Japanese technology to meet its development goals.China is now the second largest market for Japans export and it appears that for the next decade or two China- Japan trade will continue to grow for their mutual benefit. Chinas GDP of $1.7 trillion is only 13% of that of United States and about one third of that of Japan Wang, 2005. China has a population of more than a billion and it is tidy up that the scope of development in China is enormous.After China agreed to the one-country two-system policy and Hong Kong came under its political control, countries like Singapore, Korea and Japan built considerable production facilities to China to benefit from the cheap labor costs. Hong Kong, of course being a political part of China moved many of its labor intensive industries to China. This has benefited China in boosting its exports. It has been estimated that 60% of Chinese export in 2004 came from the foreign invested enterprises. The profits of Japanese enterprises in China, of course benefit Japan too. It is clear that both China and Japan are using trade to each others advantage. What is not well known is that China is not only the fastest growing market for Japan but also for the United States.The Kyoto protocol agreed to keep India and China out of the developed countries list and as such they are not expected to limit green house gases. Although United States has also not agreed to the Kyoto Protocol, it appears that Chinese econ omy can continue to develop, at least for the time being without the worries for limiting green house gases. Absence of application of Kyoto Protocol would also be advantageous for Japanese companies working in China.JAPANS DEBT AND FUTURE DEVELOPMENTThe total debt of Japan is nearly 160% of its GDP CIA Economic Report on Japan, 2005. Most of Japanese debt is however congenital. Us Foreign debt is already approaching the internal debt of Japan and it has been estimated that by 2010 US will owe as much to the international lenders as Japan owes to its internal lenders, Japanese people. Although the difference in economic sizes of the two countries is enormous and it is not correct to compare Japan and US on the same economic eggshell but it does give us an idea that the debt that Japan built during the recession years may not hold it from future development. The demography, the huge debt problem and rise of competitive China are some of the factors Japan will have to contend to mak e economic progress.As the editorial in Rediscovering Japan declination 2003 say that with the revival of Japans economy economic pundits are once again discovering that Japan has the competitive strength to bounce back. The editorial said that that Japan is still the world second largest economy and it has streamlined itself to meet the emerging challenges from Korea and Japan. It urges US CEOs to be not influenced by media misperception and to take Japan seriously. Japan is far too important to be ignored, it said.THE ECONOMIC FORECAST FOR NEXT 20 YEARSThe Editorial from Rediscovering Japan is perhaps the best note to cease this article. Japan has the potential to develop and compete with the new emerging economies it had the ability to become energy efficient to stay competitive after the energy crisis of 1973 and 1979 and the new energy prices will probably be more of a headache for gas guzzling economies of the west. Japan has invested in its people and while other countries might build plants to manufacture Japanese cars for the present, Japan has the foresight to invest in the research and development for energy efficient vehicles possibly electric to stay ahead of the competition.Suzuki, 2004 presented medium term economic forecast for Japan (2004-2010), estimating the economic development rate to remain in the range of 2% per annum. Their forecast is however based on an oil price estimate of $28 per barrel, which we now know is more than twice that. Their assumption regarding improvement in export was also sooner conservative. The economic forecasting is poor in estimating up and down turns. Suzuki analysis had projected 2% growth rate for 2004 and 2005, which was actually 2.25% for 2004 and 4.5% estimated for 2005.Kosai and Ito, 1999 estimate that the economy growth rate for the period 2000-2025 will be 1.8% and as the economic forecast for such a long period of a habit of being out by an average 1% we can safely expect Japan to develop during the next 20 years.Japanese have proved themselves capable of meeting economic challenges presented to them. No one would have believed that Japan had the capability of bouncing back from the ravages of the 2nd World War and develop to an extent where it is seen as a threat to the other economies. One thing is certain Japan is too important to be ignored and is likely to remain so for the next 20 years and beyond.WORK CITEDAgarwal, J. D., Globalization and International Capital Flows, Keynote Address at the National Conference on Globalization Decadal Indian Experience, Kannur University, Kerela, India, 17th January 2004Agarwal, J.D. and Agarwal, A. (2001), liberalization of Capital Flows, Banking System Trade Focus on Crisis Situations, International round off of Comparative Public Policy Volume 13, pp. 151-212.Angus Madison, Economic Growth in Japan and the USSR, 2005, http//www.mail-archive.com/emailprotected/msg06027.htmlArsham, H., Time-Critical Decision Making for Business Admi nistration, http//home.ubalt.edu/ntsbarsh/stat-data/Forecast.htmArtis, M. J., How Accurate Are the IMFs Short-Term Forecasts? Another Examination of the World Economic Outlook, IMF Working Paper 96/89 (August 1996)Campbell, J. 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