1

Inflation Rate (in %)

9
7.81%
8
6.99% Legend:
7
Inflation
6 Rate
1st peak - 1970’s
5
2nd peak - 1980’s
Inflation Rate

4 3rd peak - 2000’s

4th peak - 2012’s
3
5th peak - 2014
2.76%
2

1
-0.3%
0
1960 1970 1980 1990 1995 2000 2012 2014 2016
-1
-0.65%
-2
Year

Sources: http://www.inflation.eu/inflation-rates/japan/historic-inflation/cpi-inflation-japan-
1975.aspx
http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-
magazines/econometric-models-aggregate
2

Economic Analysis on Inflation

Significant Peaks

1970’s RISE OF THE JAPANESE ECONOMY (6.99%)

Japan was at its peak during the 1970s however there were two factors that contributed to
the rapid increase of inflation. First is their poor domestic macroeconomic policy that resulted to
increasing money supply. The increase of money supply was due to the Bank of Japan's foreign
exchange intervention to support the dollar or in other words a massive dollar buying.
Furthermore, Prime Minister Kakuei Tanaka's fiscal policy called “Japanese Archipelago
Rebuilding Plan" wherein active public investment for large-scale transportation infrastructure
was encouraged. Second is the Arab oil embargo (The oil price shock). Oil prices increased
dramatically and Japan being one of the industrialized country and dependent to foreign oil was
heavily affected.

As a conclusion, despite of the booming economy of the Japanese there is still inflation
happening. In accordance to Schiller’s and Samuelson’s theory, the inflation rate during the
1970s was not able to attain price stability.

1980’s BUBBLE ECONOMY (7.81%)

For a second time in 1980 Japan suffered from high inflation and recession mainly due to
the price hikes of oil and the poor macroeconomic and fiscal policies. However, Japan faced yet
another economic stir that affected inflation rate during the 1985 Plaza Accord wherein the
Secretary of the Treasury of USA together with the finance ministers of Britain, France, West
Germany and Japan made the plan (Plaza Accord) to reduce the value of the dollar to increase
the export of American goods. The plan worked but it also doubled the purchasing power of the
yen. As a result, stock prices rose in value as well as the prices of all the other commodities in
the market. Excessive investments were made; many businesses began hiring as well as the
acceleration of inflation. Hence, 1980s was considered BUBBLE ECONOMY

Japan was the first country to shift processing specifically on telecommunications and
manufacturing automation. However, In spite of the fact that many investments were made
during this era, the Japanese still suffered from the effect of 1970’s Arab oil embargo. As result
3

the country was still not able to attain price stability but rather recorded their highest inflation
rate of 7.81%

2000’s LOST DECADE (-0.12%)

During 1990s through 2000, Japan was in an economic stagnation and price deflation.
This era was called the burst but also known as “Japan’s Lost Decade”. There were two reasons
behind this namely Credit crunch and liquidity trap. The liquidity trap is the situation in which
prevailing interest rates are low and savings rates are high, making monetary policy ineffective.
Japanese consumers and investors avoided to spend or invest because they believed goods and
services will be cheaper tomorrow The Bank of Japan's discount rate was 0.5% for much of the
'90s, but it failed to stimulate the Japanese economy. Moreover, the credit crunch is an economic
condition in which investment capital is difficult to obtain. Banks and investors become wary of
lending funds to corporations, which drives up the price of debt products for borrowers. As a
result of banks unwilling to lend consumers and businesses are unable to spend, causing prices to
fall. Both factor perpetuated the deflation in the country.

The lost decade resulted to a deflation thus Japan was still not able to achieve price
stability.

2012 UNEXPECTED ECONOMIC CRISIS (-0.3%)

Japan was expected to recover during 2012 however Japan faced an unexpected
economic crisis that caused another reason for the inflation rate to rise due to the Great East
Japan Earthquake. The Japanese economy was also affected by the floods in Thailand where a
number of Japanese companies have manufacturing bases forcing many Japanese-owned plants
there to suspend operations and caused a major deterioration in Japan’s trade. Also the ongoing
European economic crisis where European banks reduced lending within euro area and caused
these countries to cut their trade with the Asian countries and Japan was one these countries
affected by it.

Despite the deflation, Japan was slowly recovering. Unfortunately, price stability was
unattained.
4

2014 THE NEW ECONOMIC POLICY (2.76%)

After the past two decades of deflation and stagnation, Japan’s inflation rate increased in
2014 Japanese Prime Minister Shinzo Abe has introduced Abenomics. It is a set of economic
policies designed to recover from the decades-long deflationary slump. They are built on
unprecedented monetary easing, government spending and business deregulation. Abenomics is
consist of Monetary Policy of 2% inflation targeting; Fiscal stimulus of Public works spending,
government consumption, tax incentives for companies; Structural reforms; higher share prices,
higher wages, increase in consumer spending and increase in exports, all of this in order to
encourage the people to spend to resume economic activity. Bank of Japan also increased money
supply believing that this might increase prices and push consumers and businesses to spend
money and invest.

In accordance to Samuelson’s theory, during this year Japan was able to recover and
attain price stability with 2.76% inflation rate.
5

Unemployment Rate (in %)

5
Legend: 4.7% 4.5%
4.5
Unemployment Rate Legend:
4 1970’s - 1980’s
3.7%
2000
3.5 2012 - 2014
3
Unemployment Rate

2.5
1.9%
2

1.1%
1.5

0.5

0
1960 1970 1980 1990 1995 2000 2012 2014 2016
Year

Sources:
https://www.japanmacroadvisors.com/page/category/economic-indicators/labor-
markets/unemployment-rate/

https://www.japantimes.co.jp/news/2014/09/04/national/japans-suicide-rate-exceeds-world-
average-who-report/#.WafTEsiGPIU

https://www.bls.gov/opub/mlr/1984/03/art3full.pdf

https://books.google.com.ph/books?id=Wtkm3O3nWXkC&pg=PA119&dq=unemployment+and
+employment+in+Japan+during+1970s&hl=en&sa=X&redir_esc=y#v=onepage&q=unemploym
ent%20and%20employment%20in%20Japan%20during%201970s&f=false

http://ftp.iza.org/dp9391.pdf

http://www.jil.go.jp/english/lsj/general/2015-2016/2015-2016.pdf
6

Economic Analysis on Unemployment

Significant Peaks

1970’s – 1980’s THE DEFINITION & CONCEPTUAL DIFFERENCE (1.1% - 1.9%)

During 1970s and 1980s Japan has always been one of the few countries who has low
unemployment rate due to their booming economy however according to other studies the low
unemployment rate was due to the understated unemployment rate and their long-term
employment system. Because of definition and conceptual difference, Japan does not include
“Discouraged” workers (workers who have stopped actively seeking work but are available) that
Japan understated unemployment rate occurs. Moreover, the long-term employment system was
also the key to the low unemployment rate. Under this system are (1) Maintaining stable
employment and avoiding layoffs. To do this, business firms reduce working hours or hoard
labor though this would greatly affect the productivity and profitability of the business. And (2)
Age earnings profile also known as “delayed payments” system hinders an employee to change
employer.
In conclusion, Japan wasn’t able to achieve full employment during this era with an
average 1% of unemployment rate.

2000 START OF RECOVERY STAGE (4.7%)

During the “Lost Decade” Japan suffered long-term deflation and underwent structural
changes that affected the unemployment rate. The country suffered “Employment Ice Age”
where job seekers couldn’t find the job they wanted. As a result, they left their current jobs and
remained disregarded. Also this was the time when non-standard, part-time, temporary and
dispatched workers started to rise. There was an increased need for employment flexibility
caused by globalization, technological advancement and product market competition. As a result,
competition of workers increased too and made it hard for them to commit in one business firm.
An employment method was also established where enterprises began downsizing their
workforce, soliciting voluntary early retirees and laying off employees, and reducing overtime
hours and curtailing mid-career hiring. Eventually, Japan suspended the hiring of part-time and
dispatch workers
7

Ironically, although the economy of Japan was in a bad state because of deflation It
actually achieved full employment in 2000s with 4.7% unemployment rate in accordance to
Schiller’s theory.

2012 FIRST YEAR OF ABENOMICS (4.5%)

During 2012, the second Abe Administration implemented a new labor policy that
includes comprehensive measures to boost the birth rate by advancing women’s participation in
the labor force by enabling them to balance their work and childcare. The labor policy was also
implemented to aid the problem of their shrinking population which affected the labor market of
the country. Their shrinking population was due to the country’s high suicide rate that exceeded
the world average 29,442 people committed suicide in 2012 — 20,888 men and 8,554 women —
which translates into an age-adjusted rate of 18.5 suicides per 100,000 inhabitants, about 60
percent higher than the global average of 11.4. Unfortunately, most of the people who committed
suicide are around 15-24 years old.
Abenomics was a success during this year in terms of controlling their unemployment
rate and the Japanese economy was able to attain full employment with 4.5% unemployment
rate.

2014 FAILURE OF ABENOMICS (3.7%)

Another policy was added to Abenomics where they are restricting excessively long
working hours, Transforming working styles so as to maximize the potential of each individual
worker and also to improve childcare to boost birth rate.
During these years, the Prime Minister implemented new policies that would solve the
problem of their continuing labor shortage but unfortunately, they weren’t able to attain full
employment.
8

Investment

28
27.05% - 27.267% Legend:
1970’s - 1980’s
27 2000
Gross capital formation (% of GDP)

2012 - 2014
26
24.358%
25
24.29% - 24.314%

24

23

22

21
1960 1970 1980 1990 1995 2000 2012 2014 2016
Year

Sources:
http://data.worldbank.org/indicator/NE.GDI.TOTL.ZS

https://eh.net/encyclopedia/japanese-industrialization-and-economic-growth/

http://www.thebubblebubble.com/japan-bubble/
9

Economic Analysis on Investment

1970’s - 1980’s THE BURGEON (27.05% - 27.267%)

The “bubble economy”, during this era Japan achieved sustained growth in per capita
income through industrialization. The continues growth was due to domestic investment of both
private and public sectors in infrastructure and the national and local governments serving as
coordinating agents for infrastructure build-up. The investment in manufacturing capacity was
largely left to the private sector, rising domestic savings made increasing capital accumulation
possible and the Japanese growth was investment-led, not export-led.
Therefore, the massive investment and booming economy gave rise to increase in job
opportunities thus the low unemployment rate. In terms of inflation rate, when the economy is
good the inflation rate increases and when the economy is in a bad state the Japanese economy
tend to suffer deflation.

2000’s THE DOWNFALL (24.358%)

The bubble economy (1980s) where excessive investment and employment took place
resulted to deep financial crisis which lead to the start of “Lost Decades” thus the downfall of
investment due to liquidity trap. The gradual downfall of inflation rate as well as the decrease of
investment brought domestic businesses in Japan to lay off workers but ironically, the increase of
unemployment rate by 4.5% in 2000 is considered as “Full Employment” according to Schiller.
In conclusion, Investment decisions rely on the status of inflation rate that’s why during
deflation there was a low investment activity causing stagnation for two decades.

2012 - 2014 ABENOMICS (24.29% - 24.314%)

Economic policies brought by “Abenomics” to aid the continuous downfall of the

economy however did not improved Japan’s investment. Despite the ineffectiveness of
“Abenomics” with regards to investment, it helped in decreasing the unemployment rate and
Japan was finally out of the deflation stage.
10

Currently, the Japanese government is unable to aid the problem of stagnant investment
on the other hand unemployment rate may be affected by the inflation rate and investment but a
strategic employment policy helps in helping and controlling the unemployment rate.
11

Year 2015 2005

I. Agricultural, Forestry and Fishery 5,617,500.00 6,108,000.00

II. Industry, including energy 122,496,900.00 111,811,000.00
A. Manufacturing 93,078,000.00 99,699,000.00
B. Construction 29,418,900.00 29,018,000.00
III. Service Sector 368,217,800.00 353,672,000.00
A. Information and communication 26,505,100.00 26,269,000.00
B. Distributive Trade & Repair of 114,102,100.00 99,194,000.00
Motor Vehicles & Household
Goods, Transportation, accomod.,
food serv.
C. Financial Intermediation 23,556,800.00 30,789,000.00
D. Real Estate, Renting and 60,429,900.00 54,042,000.00
Business Activities
E. Public Administration and 120,348,600.00 54,945,000.00
Defense, Compulsory Social
Security , Education, human health,
Prof., Scientific, Techn., Admin.,
Support serv. Acivities
F. Other Service Activities 23,275,300.00 88,433,000.00
GROSS DOMESTIC PRODUCT 496,332,200.00 471,591,000.00
Net Factor Income from Abroad 165,876,836.02 103,089,144.99
GROSS NATIONAL PRODUCT 662,209,036.00 574,680,145.00

Current Prices

Sources:
http://www.keepeek.com/Digital-Asset-Management/oecd/economics/national-accounts-of-oecd-
countries-volume-2014-issue-1/gross-domestic-product-output-and-income-approach-
japan_na_ma_dt-v2014-1-table100-en#page1
http://data.worldbank.org/indicator/NY.GSR.NFCY.CD?end=2015&locations=JP&start=1960&
view=chart&year_high_desc=true
http://stats.oecd.org/index.aspx?queryid=218
https://eubusinessinjapan.eu/sectors
12

Economic Analysis on Japan’s GDP

The significant changes occurred from 2005 to 2015 of Japan’s GDP can be seen in its
Service sectors such as their Trade, Financial intermediation and Public Administration. During
2005 there was a favorable monetary condition, continuous growth in world trade, rising profits
and improved balance sheets in the corporate sector. 2005 was considered the recovery year after
the stagnation of the “Lost Decade”. Subsequently, during 2012 ‘Abenomics’ took place but
instead of reversing the poor growth of the country through this programme, Japan’s economy
shrunk in 2015 by 0.4% because of weak domestic consumption and slow exports weighed. To
address the problem, the programme called for big government spending, massive central bank
monetary easing and reforms to a highly regulated economy as a result of the increase of the
public administration or the government spending in 2015. There is a major income changes in
Japan’s Agricultural, Forestry and Fishery it decreased by .080% this is due to a severe shortage
of arable land, covering only 11% of Japan’s total territory. The country’s self-sufficiency rate
currently stands at 39%.

The automotive sector is worth 47.3 trillion yen both imports and exports and currently
employs over 5.45 million people in Japan and also has one of the most developed
biotechnology sectors in the world as a result it has a high number of patents filled. However, it
is the service sector which is the major income contributor to the country this includes trade and
repairs, banking and insurance, transportation and telecommunications, and education.There are
two components that play a significant role for the economic growth of Japan, namely the
Abenomics itself and the population of Japan. Ironically, Abenomics’ goal was to improve the
economy of the country but instead it was a program of aggressive money printing in order to get
money flowing again and increase spending and consumption which did not succeed. Second,
Japan is running out of people. The country’s population is shrinking affecting the labor force of
the country shrinking at 0.8% per year. Abenomics implemented comprehensive measures to
boost the birth rate but unfortunately it keeps on failing due to the fact that Japan has a relatively
high suicide rate compared to other countries.

In conclusion, although Japan is currently facing continuous trouble in stabilizing their

economy it cannot be denied that it still is one of the richest countries because of its innovative
and highly advanced technology. However, volatility rests in their agricultural, forestry and
13

fishery due to its small contribution to Japan’s GDP. Furthermore, overall assessment of the root
cause of Japan’s continuous economic downfall in relation to their inflation, unemployment rate
and investment despite its government’s effort to address the problems is because of the Japanese
people themselves. Because once deflation set in consumers started to expect prices to fall and
they delayed spending for as long as possible in order to save money. That perpetuated the
problem and continued the cycle. And second, despite the effort to boost birth rate population
keeps on shrinking due to high suicide rate affecting the labor force thus the increase of
unemployment rate.
14

Japan’s GDP Growth (in %) with Business Cycle

7 Prosperity

5 Recovery
Recession
4

2 Depression

0
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
2000
2002
2004
2006
2008
2010
2012
2014
2016
-1

-2

-3

Sources:
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2016&start=1961&view=char
t
https://sites.google.com/site/kjcca2013/japan-s-business-cycle
Sources:https://www.ukessays.com/essays/economics/an-economic-analysis-of-japan-
economics-essay.php
http://www.fujitsu.com/jp/group/fri/en/column/message/2016/2016-03-23.html
http://www.mext.go.jp/b_menu/hakusho/html/hpae196301/hpae196301_2_005.html
http://www.nejm.org/doi/full/10.1056/NEJMp1410676#t=article
https://www.bloomberg.com/news/articles/2017-03-07/japan-s-fourth-quarter-economic-growth-
revised-up-to-1-2
http://thediplomat.com/2013/05/revising-the-japanese-constitution/
15

Economic Analysis on Business Cycle

After World War II, Japan experienced high economic growth during 1967 and the 1980s
and became the second largest GDP in the world hence the prosperity stage of Japan. The
country’s labor force contributed significantly to economic growth, because of its availability
and literacy, and also because of its reasonable wage demands. The transfer of numerous
agricultural workers to modern industry resulted in rising productivity and only moderate wage
increases thus Japan become prosperous in 1973. Unfortunately, it was also the starting point of
the bubble economy. Japan's real GNP growth slowed to 1.7%. Even industries such as
automobiles and electronics that had experienced phenomenal growth in the 1980s entered a
recessionary period in 1992 resulting to a negative economic growth for two consecutive
quarters and the domestic market for Japanese automobiles shrank at the same time that Japan's
share of the United States' market declined. Foreign and domestic demand for Japanese
electronics also declined, and Japan seemed on the way to losing its leadership in the
world semiconductor market to the United States, Korea and Taiwan. Japan suffered economic
stagnation or depression following the Japanese asset price bubble's collapse of 1990s to 2000
referred to as the Lost Decade broadly impacting the entire Japanese economy. The economic
effect is well established and Japanese policymakers continue to grapple with its consequences.
It took longer to recover from the impact of these events because the conditions imposed by the
new environment were not favorable to the Japanese management style at that time. The country
gradually sustained a long-term downturn in economic activity until 2009 with a -1.735% GDP
growth resulting to a depression. Japan had a mild economic recovery in the 2000s but has not
returned to the same pre-crash levels. After Shinzo Abe was elected as Japanese prime minister
in December 2012, Abe introduced a reform program known as Abenomics sought to address
many of the issues raised by Japan's Lost Decade. Recovery started with moderate deflation and
subsequently in 2010 with full recovery of 4.327%.

During the prosperity stage, Trade expanded because of the yen’s appreciation, Japan had
stable wholesale prices, low unemployment rates, high corporate profits, low corporate failures,
stock and land prices started to rise, and lots of funds went into the stock and real-estate markets.
The recession stage on the other hand, stock prices fell hard fast, and land prices and investment
declined at the same time and the unemployment rate started to rise due to Employment Ice-Age.
16

The downfall of the economy continued with the same problems encountered resulting to the
depression stage also called as the “Lost Decade”. Japan was able to recover with the help of
foreign demand. Despite of the moderate deflation, investments began to resurface in Japan and
began to stabilize through 2016, unemployment started to drop and inflation rate normalized in
2014.

In conclusion, Japan achieved economic development during 1962 to 1966 where they
maintained 5-6% annual growth for five consecutive years but for the following years Japan was
not able to maintain it. Nonetheless, there were still economic growths during 1968-1969 (6%),
1972, 1973, and 1976 with 5-6% growth rate. Currently Japan hasn’t achieved an economic
growth ever since the year 1990s.
17

Economic Development of Japan

Japan was able to maintain 5-6% annual growth for five consecutive years during 1962 to
1966 which means the country attained economic development in accordance to Todaro’s
principle. Furthermore, consistent economic growth was also achieved by Japan during 1968 and
1969 with 5-6% annual growth as well as in years 1972, 1973, and 1976. During 1990 Japan’s
GDP growth began to rapidly decrease with having only 4% as their highest GDP growth rate.
As of 2009 data, Japan was named second largest economy next to USA. The country has the
second highest GNP despite all the global and domestic economic meltdowns. As a very rich
nation in the world Japan records a high income per capita.

Japan had undergone four organizational changes the Hashimoto (1997), Koizumi (2002),
Democrats of 2009 and 20011 for economic reforms. Currently, Japanese government is
implementing “Abenomics” it refers to the economic policies advocated by Shinzo Abe, who
became prime minister of Japan for a second time when his Liberal Democratic Party won an
overwhelming majority in the general election in December 2012. Abenomics is distinguished by
a set of policies comprising “three arrows”: (1) aggressive monetary policy, (2) fiscal
consolidation, and (3) a growth strategy. Japan also became a member of WTO and since the
country’s GDP depends upon exports and imports its government entered into many bilateral and
multilateral trade agreements such as imposing low trade restrictions but also prohibiting
dangerous and unnecessary products to be imported into the country such as firearms and opium
in order to facilitate international trade. Japanese government imposed import restrictions like
tariffs, complying with the requirements to take import approval from relevant Japanese
authorities using a special form and paying import duties between 3-15% which is applicable
plus consumption tax of 5% based on the total cost of the product.

The education system of Japan is also considered as one of the foundation on which the
modern Japanese economic system was created although it does not contribute directly to
economic growth. In other words, the country’s education raised the quality of the people's skills,
modernized their thought, and made it possible for them to participate successfully in modern
economic activities. Japan consists of highly educated workforce and their total workforce
reaches 65.9 million workers with unemployment rate of 5.6% in 2009 (Japan, 2010). Majority
18

of labor force occupied in services with about 68% and the least number of labours are occupied
in the agricultural segment with only 4% (Japan, 2010).

The country is also known with its achievements in health status. Japan has ranked first in
the world in women's life expectancy at birth, which reached 87 years in 2014. Life expectancy
for Japanese men surpassed 80 years in 2013. However, the country’s infant mortality rate,
reported as 2.1 per 1000 live births in 2013, is the lowest in the world. The proportion of older
people has exceeded the proportion of young people (0 to 14 years of age) since 1997. This
demographic transition has created huge fiscal and health care challenges. To address the
problem the government expanded health coverage through policies designed for different
groups with differing levels of needs both in terms of benefits and funding resulting to a rise of
health care cost. Currently, the Japanese economy faces an aging population and increasing
social welfare and the government is trying to find ways to address these problems.

In terms of business, Japan’s economy has expanded for four consecutive quarters but the
growth was due to exports while private consumption at home remains low. The strong
investment in the country is coming from foreign demands and not from domestic demands.
Moreover, the yen’s decline following Donald Trump’s election is expected to support corporate
profits, but economists are skeptical that companies will pass that along to workers via
significant wage gains.

Just recently, Prime Minister Abe Shinzo announced his plan to revise their constitution
particularly article 9 that talks about renunciation of war. Abe’s goal is to rewrite Article 9 by
limiting the renunciation of war and stating only that Japan refrains from the use of force to settle
international disputes the justification for this is that Japan cannot fulfill its obligations under
collective security agreements and within the UN without a normal military force and it would
provide better protection for Japan, as the country and its people face new security threats. Those
include a nuclear-armed North Korea and persistent territorial disputes with China, Japan’s
largest trading partner. However, majority of the Japanese people disagree with his plan with the
reason that article 9 has been presented as a source of pride of the Japanese because it represents
their culture. Currently, the Prime Minister is in dilemma between the cultural consequence,
safety of the country and most especially its relationship with their trading partners.
19

Generally, Japan had only achieved economic development during the 1960s and
currently facing two problems that hinders them from attaining economic development. One is
their aging or shrinking population and the other is the fact that they rely too much on their
exports to boost their GDP because their domestic demands runs low and because of that there is
a need for them to maintain good relationship with their foreign trade partners resulting to
compromising one of their constitution.