Economics Term Paper

Topics: Monetary policy, Inflation, Central bank Pages: 7 (1649 words) Published: November 16, 2014

Analysis of Japan’s Economic Recovery
Zhenhao Piao

Section AQ3--10 A.M
TA: Roberta Afonso

Article: New Threat to Japan’s Growth.
Wall Street Journal, November 11, 2013.

1. Introduction
The article points out that Japan’s economy, after three-month consecutive growth, is likely to slow to less than half the pace recorded in the half of the year (Takashi, 2013, para.1). However, the author claims that the slowing pace doesn’t indicate that Prime Minister Shinzo Abe’s economic recovery plan is faltering. Abenomics, master plan of Prime Minister Abe, emphasizes to recover Japan’s economy by depreciating the yen and temporarily increasing infrastructure spending. The author cites the report from International Monetary Fund (IMF) Economic Outlook established in October. The report stated that Japan’s Gross Domestic Product (GDP) would grow 1.2% next year, below the 2% pace for advanced economies. GDP is related to national account, a subject of macroeconomics. Secondly, the author indicates that the economic growth of Japan affects not only its domestic economy but also the global economy (Takashi, 2013, para.5). Japan, as the world’s third largest economy, has an indispensable impact on global economic recovery. Thirdly, the article analyzes the main issues that cause the slowdown of Japan’s economy such as declining exports, declining consumer spending and central bank’s radical monetary policy. These factors involve macroeconomics aspects such as international trade, aggregate expenditure, and monetary policy, which study and observe the performance, operation and decision-making of an economy as a whole. Moreover, the author states that many of the problems of Japan’s economy originate from emerging markets such as Indonesia and Brazil, which are the destinations for most of Japanese exports. At the end of the article, the author alerts that 70% of newly issued government bonds were absorbed by Bank of Japan, the central bank of Japan. 2. Theory Review and Analysis

Abenomics, economic recovery plan of Prime Minster Abe, involves three main aspects: increasing money supply, increasing government spending, and depreciate the yen in foreign exchange markets. During the first quarter of 2013, Japan’s economy grew 0.9%, the fastest speed since the first quarter of 2012. First in first, Mr. Abe requests Bank of Japan to issue more banknotes, implement quantitative easing monetary policy and buy newly issued government bonds. Increasing the money supply, in the short run, will cause a rise in price levels—inflation occurs. The equation of exchange states that the quantity of money times the velocity of money equals the quantity of goods and services produced times their prices (Gottheil, 2013, p.246). According to the classical economists, the quantity of services and goods produced depends upon the amount of resources, which will not change in the short term. Furthermore, classical economists believe that the velocity of money always remains constant. Therefore, classical economists emphasize a direct relationship between the money supply and prices. If money supply increases, the price level will absolutely rise because velocity of money and quantity of goods and services remain unchanged.

When the Bank of Japan increases money supply by issuing more banknotes, Japanese citizens would naturally expect that there would be a rise in the price levels in the future; therefore, they would open their pocketbooks to consume more goods and services at current market prices. Changes in expectations about future prices will lead to changes in demand. The expectations of inflation in the future drive the current consumer demand to grow. In consequence, the consumer spending is certain to accelerate and lift growth over the next six months (Takashi, 2013, para.11).

Secondly, the Bank of Japan has been implemented quantitative easing to stimulate the...
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