Impact of Deflation on Japan

The Japanese economy has experienced extra economic conditions since the asset bubble of the late 1980s. Deflation and a mix of low unemployment and sliding GDP per capita have led to a very unique economic situation within the small nation. Rivalling the US in economic dominance over the last three decades, the Japanese economy is export and retail based. With a reported $ 5 trillion in nominal GDP, Japan focuses on the electronics and automobile manufacturing sectors as its key expert drivers. These areas have not always been the key growth industries, with property playing an important role in overall GDP during the mid to late 1980s. Although a key aspect of the economy, property growth and overheated valuations caused the "Asset Bubble" after the stock market crash of 87. Investment sentiment and lack of consumer spending during this period, led to a contract in GDP, economic growth and deflationary pressures .

Japan as an economic case study, is quite interesting as it uncovers the balance between growth, unemployment, monetary and fiscal policy. In much of the developed OECD world, countries who experience contraction in growth will also experience high employment and lower levels of taxable revenue. This tradition style of economics has never been applied to Japan since the late 80s with economists focusing on consumer savings and spending as the key differential factor. Spending in most cases is driven by consumer sentiment, and risk appetite with central banks highlighting that it can be a consequence of tight or lose monetary policy. Japan in an attempt to boost overall economic growth after the asset bubble, started to weaker its monetary risk levels and drop interest rates to low levels. Unlike other economies this had little impact on overall consumer spending, with savings rates hitting all time highs. Economists believe the conservative nature of the Japanese investor led to further GDP weakness, extended recessionary period and deflation. What economists found unique about the Japanese economic situation during the 80s and 90s was the fact that unemployment levels stabilized during the period. This had a consequence on not only the domestic economy but also on inflation levels, with a heightened awareness of the impact of deflation.

The key question however during this period was the impact that deflation would have on the long term Japanese economy. Investment in local industry was impacted, however the awareness and emphasis shifted towards international trade and its overseas export market. Car manufacturers and electronic producers were able to tap into new markets and transform the Japanese economy into a global powerhouse. Deflation became a secondary point behind the global sustainability of the Japanese economy. Key risks have moved away from Global Domestic Product Weakness to Currency Appreciation. An export nation is sensitive to foreign exchange movements and consumer capacity. Over the next few years Japan will be an interesting model to watch, as the global economy moves into a new phase with increased awareness on leverage and lending. A shift in policy may see a transformation similar to that of the last three decades.

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