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ABENOMICS

By hafyst33 Jun 05, 2015 2313 Words


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Program / Intake : BSc 45
Pathway: Management
Student Name:
Koh Li Li

Student Number:
13212330
Module:
Economic Policy and Global Environment

Lecturer/Tutor:
Rodney Sim

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DECLARATION: I hereby declare that the attached assignment is my own work. I understand that if I am suspected of plagiarism or another form of cheating, my work will be referred to the Academic Registrar/ or the Board of Examiners, which may result in me being expelled from the program. Signed: Date Submitted: 27 June 2014

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Student Name: Koh Li Li Student Number: 13212330

Program / Intake: BSc 45
Module: Economic Policy and Global Environment
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National University of Ireland, Dublin

Bachelor of Science (pathway)

Intake: 45

Module: Economics Policy and Global Environment

Essay Title: Abenomics

Submitted by: Koh Li Li

Student Number: 13212330

Lecturer: Rodney Sim

Submission Date: 27 June 2014

Word Count: 1983 words

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Economic Policy and the Global Environment
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Rodney Sim
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02
Assignment Due Date
27 June 2014
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TABLE OF CONTENTS PAGE

SUMMARY OF ARTICLE……………………………………5

INTRODUCTION ………………………..…………….…….5

DEFEATING INFLATION………………………………….5-7

INCREMENT IN GOVERNMENT SPENDING…………...7-8

ADOPTING MONETARY POLICY……………………….8-10

STRUCTURAL REFORM……………………………….....11

CONCLUSION…………………………………………..……12

BIBLIOGRAPHY……………………………………..………13

PLAGIARISM CHECK CERT ………………………….…..14

ARTICLE……………………………………………………….15

Summary: Abeconomics Hangover

Japan Prime Minister (PM) Shinzo Abe has a dream. It is to reverse Japan’s twenty years of economic stagnation combined with fifteen years of deflation. His reformation involves three policy arrows: monetary easing, fiscal stimulus and structural reform. These policies are known as Abenomics.

Some of his policies are working so far as deflation decreases but Japan has a long way to fully recover to compete in this ever aggressive global economy. The Japanese Nikkei stock market is still unstable and the central bank has yet to achieve its target of two percent inflation. Some economics analysts have disagreed with Abenomics but some still have faith that Abenomics may still come through. The world is awaiting PM Abe’s revelation in June with regards to his enhanced growth strategy and the highly debated corporate tax issue (Ackroyd, 2014).

Introduction

Japan’s economy flourished and grew astoundingly during the year 1950s to late 1980s with an average annual growth of five to ten percent. Property prices hiked up and stock market values increased tremendously between year 1970s to1980s. In year 1990s, the property and stock market bubble burst and led to the historical “Lost Decade”. The Japan economy collapsed and the effect of the “Lost Decade” is still felt by the Japanese till today.

Japan’s economy is vastly diversified and technologically advanced. Its service sector contributed greatly to the gross domestic product (GDP) annual rate with the highest percentage of around sixty two percent. Besides services, the manufacturing sector holds up to twenty percent of Japan’s GDP. It is reported that the GDP annual growth rate expanded three percent in the first quarter of year 2014 over the previous year (Tradingeconomics, 2014).

Defeating deflation

Japanese economy has been facing deflation since the “Lost Decade” and has not recovered from it yet. Ongoing deflation causes greater consequences than inflation. When PM Abe came back to office in December 2012, he sets out to make efforts to stimulate inflation by inducing higher prices for goods and services to increase profits for businesses while maintaining the cost of production and the potential GDP.

It is not an easy task as consumers may not be willing to spend for higher priced goods and services but PM Abe realised that Japan needs a little bit of healthy inflation in order to reverse the current business cycle of its economy. He believes that a rise in price level for goods and services can stimulate an increase in quantity of the real GDP as businesses are able to make higher profits thus, productions will be increased.

When profits are made by businesses, wages and bonuses will then increase too and more job opportunities are also created. More consumers then can afford to spend for goods and services. PM Abe and his cabinets predicted that the rise in earnings will create a boost in consumption and stock market prices.

PM Abe wants to stimulate inflation with hopes that the total spending in the economy will rise and this will drive Japan out of recession and curb unemployment issues. Increment in wages and bonuses give hopes for better future income and growth in economy for the Japanese, and this will encourage consumers to spend. It was reported that due to the success in stimulating inflation, extra spending has driven growth in the economy. Japan’s economy has grown more than one point five percent in the first quarter of year 2014 (Xu, 2014). It is a method of fiscal policy expansion by increasing aggregate demand in the economy due to the rise in consumers’ earnings.

An increase in price level will lead to an increase in future income which then shifts AD1 to AD2 due to the rise in aggregate demand (demand curve shifts rightward).

When aggregate demand shifts rightward, quantity of real GDP shifts rightward from Q1 to Qp to close up recessionary gap.

Increment in Government Spending

Besides increasing prices for goods and services, PM Abe has set aside a huge sum of money, about 10.3 trillion yen for the government to spend on improving the nation’s infrastructure. Plans to build new bridges, tunnels and earthquake-resistance roads are being finalised. With these projects planned, the government aims to create six hundred thousands jobs in two years. PM Abe’s move to increase government spending despite economic recession is not a bold move or an act of arrogance. It aims to stabilise the business cycle as an increment in government spending increases aggregate demand. This follows the government spending multipliers rule in fiscal policy.

AD represents Aggregate Demand, ∆G represents government spending.

When government spending increases with price levels, aggregate demand curve shifts rightward. AD1 shifts to AD2 then to AD3 after including government spending in the equation due to the multiplier effect.

The multiplier effect of government spending closes up the recessionary gap in the economy.

Adopting Monetary Policy

Although the Japanese economy was at zero inflation for many years, the demand has remained weak thus causing this depressing deflation. In January 2013, the central bank of Japan (BOJ) has decided to double the target rate of inflation to two percent. Newly elected BOJ governor Haruhiko Kuroda aims to conduct purchases of assets such as longer-term government bonds and corporate bonds in the open market operations. This expansionary monetary policy increases the base supply of money which then increases excess reserve in commercial banks for loans.

As the quantity of money increases, the money supply curve shifts rightward. MS1 shifts to the right to MS2.

The nominal interest rates decreases from R1 to R2.

When the nominal interest rates decreases, interest rates for all loans decreases too. This will stimulate a growth in aggregate demand.

Lower interest rates means more consumers are willing to take up loans to purchase goods and services, especially for higher priced goods such as cars and properties.

As interest rates decreases, more loans are taken by consumers to purchase goods and services, creating an increase in aggregate demand.

Real GDP increases from Q1 closer to the potential GDP which is represented by Qp.

When real GDP increases closer to potential GDP due to the aggregate demand curve shifting to the right, recessionary gap closes up.

PM Abe’s cabinet and the BOJ adopted a loose monetary policy, and has successfully reduced the exchange rate of Japanese Yen again the US dollars. The Japanese Yen has decreased by fifteen percent against the US dollars since the end of year 2012 (Zhang, 2013). By lowering exchange rates, the economy experienced a rise in exports, boosting growth in its GDP. Low exchange rate between the Japanese Yen against major foreign currencies also encourages consumers to opt for locally produced goods and services-increasing the GDP of the economy. Structural Reform

PM Abe’s last arrow is structural reform which he has unveiled an upgrade in late June 2014. His structural reform consists of encouraging women to join the workforce, liberalising the agricultural and healthcare sectors and boosting financial investment. Through bold economic reformations, PM Abe aims to realise his dream of driving Japan out of recession and the ever lingering deflation, reviving the world’s third-largest economy.

Japan’s workforce ranges between the ages of fifteen to sixty four years old. In these ten years, the workforce has contracted by six percent (Xu, 2014). This has been a troubling situation and if no major reform is done to curb this situation will cause a drop in production activity which decreases aggregate demand. PM Abe has taken actions to strengthen the role of women in Japan as measures to increase workforce population (Rowley, 2014). The government has refine its child-care support policies and beginning to adopt policy to eliminate spousal tax exemption as means to encourage the women population to join the workforce.

The government has also been conducting talks with the United States under the Trans-Pacific Partnership with regards to expanding Japan’s agriculture sector. PM Abe’s New Growth Strategy aims to raise agricultural exports and he urges the agricultural cooperatives to reform and expand its businesses (Rowley, 2014). Under his New Growth Strategy, he announced that the government will be reducing corporate tax rates from thirty five percent to thirty percent (Mochizuki, 2014). This aims to increase foreign direct investment in Japan to boost the country’s economy.

Conclusion

Abenomics focuses on three arrow policies which are short term fiscal stimulus, easing monetary policy and structural reformations to deflate its economy and drives it out of recession. So far, a slow-paced mild inflation has been successfully created through the short term fiscal stimulus policy. Japan has yet to reach the BOJ’s target rate of inflation and may take a longer time to do so. PM Abe’s New Growth Strategy which targets to increase workforce by encouraging the women to work is promising but due to the rising percentage of aging population, he needs to consider other alternatives. Perhaps like Singapore, importing foreign talents may help to curb this dilemma to ensure ongoing production activities.

Some may think PM Abe’s policies will not be able to help pull Japan out of deflation and recession will continue to linger for decades to come. Some praised PM Abe for his determination and perseverance in hopes of reviving the economy. Ultimately, we should give Abenomics more time as it is not easy to implement policies and reformations to revitalise an economy which has been in deflation for decades.

Bibliography

Ackroyd, Alison. (2014): Abenomics Hangover, Finance Asia

Harari, Daniel. (2013): Japan’s Economy. Available at http://www.parliament.uk/business/publications/research/briefing-papers/SN06629/japans-economy-from-the-lost-decade-to-abenomics. (Accessed 16 June 2014)

Heakal, Reem. (2011). Macroeconomics. Available at http://www.investopedia.com/articles/02/120402.asp. (Accessed 18 June 2014)

Labelle, Andrew. (2014): Abenomics Observation. Available at http://www.td.com/document/PDF/economics/special/Abenomics.pdf(Accessed on 25 June 2014)

Mochizuki, Takashi. (2014): Abe Unveils Japan’s New Growth Plan, The Wall Street Journal

Parkin, Michael. (2014): Economics Global Edition (11th Edition), Pearson

Rowley, Anthony. (2014): Japan PM Unveils His Enhanced Growth Strategy, The Business Times

Tradingeconomics. (2014) Japan GDP. Available at
http://www.tradingeconomics.com/japan/gdp (Accessed 18 June 2014).

Xu, Beina. (2014) Abenomics and Japanese Economy. Available at http://www.cfr.org/japan/abenomics-japanese-economy/p30383. (Accessed 20 June 2014)

Zhang, Moran. (2013): Currency Wars 2013. Available at http://www.ibtimes.com/currency-wars-2013-japans-weak-yen-strikes-big-blow-us-dollar-south-korean-won-euro-join-fray-global (Accessed 24 June 2014)

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