Japans lost decade

Originally began in the 1990s following the collapse of a stock market and property bubble. Inflation is virtually non-existent in Japan and there has been deflation over the years. This has deterred borrowing and spending as people think if they wait to spend they can get goods cheaper, borrowing also becomes more expensive if deflation is occurring. The Bank of Japan has been easing credit until inflation reaches 1%. The BOJ intends to inject some money into the economy through consumer spending and some through the stock market. It is also believed that if inflation occurs that the value of the Yen would fall; making Japanese exports more sought after (since they are cheaper).

The underlying problems with the Japanese market can be seen similarly in the US. Japan has a broken economics model. Export-led growth worked for Japan up until the 1990s when a rising Yen made demand for exports fall. Similarly in the US the economy is reliant on domestic consumption which after the credit crisis isn’t possible as people can no longer borrow as easily against their homes and stock portfolios. Consumption may fall even further as they have to pay back their debts.

Japan’s second problem is its ageing population, it only has a birth rate of 1.4 which is below the 2 needed for replacement growth. This weakens the domestic market and raises the costs associated with providing welfare for the elderly on the government. These extra costs may have to be acquired through increased taxes (putting the onus on the labour force) or accruing a budget deficit. The US has a similar if milder issue.

Finally both the US and Japan have large budget deficits from slow growth, ageing populations and stimulus packages to increase growth. Much of Japan’s debt has been accrued through spending on the elderly and reduced tax revenues. But because of its elderly population it means that among the younger workforce unemployment is low. From the graph we can see that Japan had lower unemployment than the Eurozone and the US.

Because of deflation in Japan, the elderly who are commonly considered savers, benefit from this. Even though interest rates are near zero deflation means they accrue an increase in money. Many bondholders of government debt are therefore willing to roll-over their bonds, this makes it easier for the government to continue to borrow.

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