(1) Large fall in trade surplus. The latest data released shows that trade surplus had shrunk by 91.15 billion yen or a steep fall of 86.6% from last year in the same period. The main reason is falling export & increasing import. Japan main export destination, US had slowed down significantly & this has hampered the lust for its manufactured goods like cars & electronics. This is worsened by the falling dollar against yen which means relatively more expensive to buy from Japan. Meanwhile, import is surging on value due to high crude oil prices which hit a record high of $147 in July, leading more outflow of income from Japan. This can be a threatening situation as exports account for 15% of its GDP
(2) Consumer confidence is at 26-years low. CPI is creeping to 2% (is considered high for Japanese economy) & this is unhealthy as it is not demand-driven but rather cost-push. As a result, consumers have cut their expenditure. Fall in C will lead to a fall in AD & this is unhealthy as C accounts for 50% of its GDP. Furthermore people have been so use to falling prices after years of deflation.
(3) Stock market plunging. Nikkei 225 stock index has continuously slipped from 2007. Major stocks like Matsushita Electrical Industrial, Toyota Motor, Honda Motor, Mizuho Financial Group have been in red-line. Falling share prices translates to fall in wealth. This may worsen private consumption. Again fall in C will lead to fall in AD.
(4) Ageing population. Japan could be on the brink of collapse if nothing is done to tackle the population issue. Japan has the greatest proportion of elderly people in the world with nearly a quarter or 27 million of its population having an age of more than 65. Meanwhile it also has the lowest proportion of children under age of 15. According to research, the current 127 million population may fall to between 82 & 99 million by 2055 & by then the economy will come to a halt
(5) Not much space for expansionary monetary policy. The current interest rate is 0.5% & this gives Bank of Japan limited space to use the interest rate maneuver to revive the economy. Unlike Bank of England or the Fed, interest rates are standing high at time of crisis & this gives them space to adjust interest rates downward comfortably
(1) China taking the lead. The fall in the export markets due to weakening US economy, is somehow being offset with the increase in demand by China. Recently, China has taken over the position of US as the largest export destination for the first time since World War II. The prospering & growing Chinese market by then will always ensure a steady appetite for Japanese goods. However some argued that this surge in demand could be temporary particularly linked to Olympics. It may slip back after that
(2) US dollar has strengthened again. The recently rebounded US dollar could be a good sign for the faltering export market. Stronger dollar means stronger purchasing power for Americans & it may induce them to spend more on Japanese goods. However some criticised that this is short lived. Given that US financial market is still in a mess, it may induce Fed to further cut interest rates. By then dollar will fall back
(3) Self-sufficient. Throughout the world, inflation is mainly caused by rising food & fuel prices. Somehow, the Japanese economy may be able to minimise the impact as it is self-sufficient particularly on the rice & fish which is their staple food. The Japanese rice crop yields are among the highest in the world. Also it has world largest fishing fleets & accounted for nearly 15% of global catch
(4) Strong base of capital goods. Traditionally, Japan has continuously devoted large percentage of its GDP onto fixed capital investment spending even in times of difficulty. Based on supply side argument, this will greatly shift the AS curve to the right in long run, thus increasing the national output & yet at the same easing inflationary pressure
(5) Increasing foreign labor. Due to ageing population & yet shrinking number of birth rates, Japanese officials will be desperate for measures like increasing the number of immigrants. There have been proposals to have immigrants making up of 10% of the population in 50 years time. The first will go for higher number of foreign nurses as carer in old age homes & hospitals. However, critics argue that this could be difficult since Japan has very tough law on immigration. Though some laws have been relaxed, other new laws have been imposed at same time