In Japan, the 20 years old’s young adults have lived their entire life in an economy of falling prices. They do not dream like what their parents used to. They experience lower job security, they are unable to leave home, have luxury purchases and take any risk. They believe that they need to save as much as they can and not to risk. One of the effect caused by the long term deflation was the non-regular employment, there is no expectations of any kind of security and saving money is a part of the defence mechanism (The Straits Times, 2016).
The key challenges faced by the country includes slow growth of the wage in the country, taxes and value of the Japanese Yen. (Investopedia, 2015). It was mentioned that household consumption is weak due to the slow wage growth for the regular workers (refer to Image 1 – Japan Wage Growth), who takes up to 60 percent of the total workforce in Japan (The Japan Times, 2017). The numbers lingers around 0 percent and there are times when it is below 0.
Image 1 – Japan Wage Growth
To reduce the government debt and help in the economy, the Japan government increases the Value-added Tax (VAT) from 5 percent to 8 percent in year 2014, and planned to increase again from 8 percent to 10 percent in year 2017 (The Tax Foundation, 2015). This has impacted the spending behaviour of the citizens too. Value of the Japanese Yen has been low (refer to image 2 – USD v HPY) as one of the results of the long term deflation.
Image 2 – USD v HPY. Source: Trading Economics
Unemployment was one of the biggest impact cause by the deflation. After the deflation start, the number of people unemployed has increased, refer to image 3 – Japan Unemployment Rate. Job availability also fell. The average monthly household income has fell while spending has increase a little, due to the higher mandatory expenses such as transport and healthcare cost (the guardian, 2009).
Image 3 – Japan Unemployment Rate. Source: Trading Economics
Japan is suffering from baby shortage. This has limited the economics’ growth as workers are struggling to pay for their parents, while the number of elderly are booming (CNN Money, 2015). These has great impact on both the society and economy. The youth has no confident with the economy, they are used to growing up in economy of deflation. They are stressed about the job security. If they lost their job, chances are it will be more difficult to get the next job and it may not be better than their current job. With the advanced technology, human skills are likely to be replaced by IT system and thus there will be higher chance that a worker will be laid-off due to improve of the technology. This has made it necessary for workers to keep improving themselves, going for training, to prevent themselves to be replaced by the technology. The improved technology helps in the overall productivity.
Under Prime Minister Shinzo Abe and bank governor, Haruhiko Kuroda, they have launched a monetary stimulus in 2013 with great success in pushing up prices and steep falls in the Japanese Yen. Due to the rise in tax on year 2014, it dragged down the prices.
However, the weakness of Yen may bring a bigger impact on the prices in the coming year. With more export activities, and Japanese consumer being more confident with the future inflation, with little wage growth, provides them with fuel for better spending (Financial Times, 2016).
The Prime Minister of Japan has introduced Abenomics in year 2013, aims to sustain and revive Japan’s economy while maintain the fiscal discipline. There are 3 areas that it focusses on, including boost productivity, drive innovation and trade, and energize corporate activity. With the boosting of productivity, the firms are able to increase the wages of the workers, and encourage them to invest in development of human resources. open towards firing the women, senior worker and foreign worker. This will increase the labour group. Women who used to be housewives are in the labour working age, however they are not contributing anything to the economy. By encouraging the firm to hire them, helps in improve the overall performance of the firm, and boost the GDP. Senior who are working helps to boost the GDP too, at the same time, helps to relieve the stress on their children to support them. Hiring foreign workers helps in both productivity and GDP.
Second area focus on driving the innovation and trade. Encouraging more innovation is a key point, with new ideas, foreign investors will be interested to invest in Japan, which hence create more job opportunities in the country. With the low value of Japanese Yen, it is a plus point for foreign investors to invest in the country as it is cheaper than ever to invest in Japan. With foreign investors, Japanese will be more confident with their economy, which will lead to more consumption and boosting of GDP.
Last area, energize corporate activities. This is to improve the firm’s performance and hence encourage employment and increase in wages through lowering of corporate tax. When the tax is lower, they are chances that the firms will use the amount to increase the wages of the workers. This area also encourages more inward foreign investment, to open up more job opportunities (Japangov, 2017).
There is demand from external Japan which encourage more export activities, which helps in the economic growth. Based on the data from 2016, it shows that exports have great impact on the GDP. Japan will have to relay on export activities to push the GDP, as the internal consumption are still weak (The Japan Times, 2017).
In conclusion, even though Japan has been in on-off deflation over the 20 years, there is still chances that inflation will happen and economy to return to its state. Government has put in effort to encourage the performance, from household, firms and international trade. With more job stability, more labour works and good performance in firms, it will encourage the firms to increase the wages, invest on human capital, and hence increase household consumption. This overall will push the performance of the Japan GDP.