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Analysis of Japan's Economic Policy

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For a long time, Japan has been known for its distinct lack of natural resources such as oil, gas, metals and other traditional energy sources, depending highly on imports for energy and raw materials for activity such as construction (Owuor, S. 2019). In this economy, manufacturing, agriculture and fishing are the main sectors, and has continued to flourish owing to cultural factors and existing infrastructure allowing for the continued growth of these industries (Stokke, 1991). Manufacturing remains the most prominent activity, comprising 29% of the country’s GDP (Statista, 2016). Primary manufactured exports include consumer electronics, optics and automobiles. Agriculture, despite being characterized by the decreasing availability of arable land and low agricultural income, has remained one of Japan’s significantly distinct industries, contributing to 1.2% of the national GDP. However, only a fifth of the total geographical landmass is suited for agriculture, with this sector’s products remaining highly subsidized (Wise, 2004). It should be noted that these subsidies signify the Japanese government’s acknowledgement of these industries as key drivers of their economic performance. The proportion of arable land has decreased consistently over the years but farming remains an important economic activity. Fishing also remains one of Japan’s biggest contributors to the economy. Internationally, Japan boasts the largest fishing fleets which accounts for an estimated 15% of the total fish caught globally (Miyake, 2005).

Production Output Performance Analysis

The value of all final goods and services produced within geographical boundaries of a country in a given time period is defined as the gross domestic product (GDP). By definition, economic growth refers to an increase in the production of goods and services in an economy, which translates to a concurrent growth of the national income.

In 2017, Japan’s GDP was worth 4872.14 billion USD, representing approximately 8 percent of the world economy. GDP in Japan averaged 2704.95 billion USD between 1960 to 2017. Against this statistic, economists have noted that Japan has reached a record high of 6203.21 billion USD in 2012, indicating reasonably solid performance in recent years in comparison to that of the past half-century. Japan’s GDP grew 0.3 percent in the fourth quarter of 2018 over that of 2017, indicating current levels of stagnation. Japan’s GDP annual growth rate remained at an average of 1.98 percent from 1981 until 2018, reaching a record high of 9.4 percent in the first quarter of 1988 and an all-time low of - 8.8 percent in 2009’s first quarter, caused by global developments such as the financial crisis.

The consistent level of growth in the Japan economy has primarily been fueled by external demand from international trade partners Japanese exports (Ellyatt, 2018). However, it has been slowing down in recent years. This has been attributed to a number of factors, including a globally weaker demand from the 2008 global financial crisis, from international demand slowdowns and challenges in the Japanese manufacturing industries arising from stricter pollution standards arising from environmental agreements such as the Kyoto Protocol.

To address the problem of depleting agricultural farmland, the Japanese diet has embarked on a program to consolidate farmlands in the 2014 Reform Package. This included the deregulation and re-distribution of farmland as a government initiative, introducing ‘farmland banks’ to administrate land transfers to expanding farms which include larger corporations, which were previously outlawed from farmland access in Japan (Jentzsch, 2017). These have the effect of reducing overall tax levels on aggregate levels for the farming industry (Aoyagi & Ganelli, 2015), contributing to a greater level of market efficiency and reduction in per-unit cost. On the macroeconomic level, this represents a rise in per-capita productivity and supposedly contributes to a greater level of national income.

Abenomics is a term coined by economists to describe the Japanese government’s current stance on ensuring economic growth. This entails monetary policy in the form of quantitative easing, discretionary fiscal policy, and structural reforms. The government has adopted monetary easing in the form of quantitative easing and negative interest rates. Initially, quantitative easing was attempted in order to stimulate greater levels of growth in the Japanese economy. In 2013, the BoJ’s quantitative easing program was announced, in which ¥60 to ¥70 trillion of bonds a year would be purchased (Bank of Japan, 2013). The BoJ announced the growth of its bond buying program in October 2014, increasing its expenditure to purchase ¥80 trillion of bonds a year (Bank of Japan, 2014). In response to slowing growth which reportedly had little effect on overall production output levels in the Japanese economy, the Japanese government began experimental loosening of monetary policies in January 2016 with the use of negative interest rates. Primarily, the Bank of Japan (BoJ) imposed artificially low interest rates to encourage borrowing, spending and investment. However, not much effect has been observed, with no observable or significant levels of growth in GDP as much as six months later in June 2016.

In 2013, fiscal stimulus in the form of expanding public investment and increased government expenditure by 2% of GDP caused an increase in the deficit to 12% of GDP (Wolf, 2013). Theoretically, discretionary fiscal policy in the form of government expenditure leads to an increase the aggregate demand for goods and services, inducing additional consumption spending arising from the initial increase in government spending in a phenomenon known as the multiplier effect. The is done with the intent of closing the deflationary gap, thereby increase levels of income on the whole.

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Structural reforms in the form of lowered corporate taxes on large firms were enacted by the Japanese diet, reducing the barriers of entry for added investment expenditure. This has the effect of financially incentivizing these corporations to increase investment activity, thereby increasing aggregate demand and therefore expenditure in the economy. Assuming the presence of spare capacity, to an actual increase in real national income will be realized.

The Japanese government has also allowed for the continual reliance of the Japanese economy on domestic exports through free trade agreements as a member of the World Trade Organization, fueling its continued growth of real national income. This is realized through the maintenance of its diplomatic position in the WTO on the international sphere, and its free trade agreements (Baldwin, 2016).

Labor Market Analysis

Typically, there exist three main forms of economic unemployment. Namely, these are frictional, structural and cyclical unemployment. Each form of unemployment is different in nature as they each hold different underlying causes. Frictional unemployment refers to the unemployment that arises as workers search for suitable jobs and firms for suitable workers. This results from market imperfections such as imperfect knowledge of existing market conditions. Structural unemployment can exist even when the economy is not in recession, referring to chronic long-term unemployment that arises from a change in economic structure, resulting in occupational immobility of labor. Workers must retrain themselves to find unemployment. This can also manifest as geographical immobility of labor where people are unwilling or unable to move to places with job opportunities. Cyclical unemployment is closely tied with economic recessions, which is defined as falling national output for at least 2 consecutive quarters, and can be caused in a decrease in aggregate demand.

Accounting for seasonal adjustment, the unemployment rate in Japan dropped surprisingly to 2.3 percent in February 2019 from 2.5 percent in January as market players expected 2.5 percent. It was the lowest rate of unemployment since September 2018. As a result of Abenomics reforms, entailing greater fiscal expenditure, monetary easing, and structural reform. Falling from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013, it appeared that the unemployment rate was continuing a past trend. This signifies that Abenomics was not entirely successful in reducing unemployment levels. This observation is consistent with the lack of significant change in GDP levels.

Price Level Analysis

Inflation refers to the situation in which there is a sustained increase in the general price level over a specified time period, and is calculated using changes in the consumer price index (CPI). According to Holzman (1960), sources of inflation are generally grouped as inflation demand-pull or cost-push in nature. Demand-pull inflation is caused by persistent increase in aggregate demand. According to the Keynesian school of thought, rises in AD are caused by increases in real variables such as household expenditure, investment by firms, government expenditure, and foreign residents’ demand for the country’s exports. Cost-push inflation attributes the basic cause of inflation to supply-side factors. It is inflation resulting from rising production costs during periods of low unemployment.

Japan is currently seeing an extended period of weak inflationary pressures, or deflation. This can be attributed to the aging population in Japan, in which average spending and demand per citizen would have fallen (Katagiri, 2018). With consumer price inflation standing at 0.2 percent year-on-year in February 2019, Japan saw no change from the previous month's yearly low, which remained below 0.3 percent which was the market’s expectation. Food, transportation and communication price indices fell for the third month in a row, while trends in housing costs remained flat. In October 2009, inflation in Japan reached an all-time low of -2.5%, spurring additional demand-targeting measures on the part of the Japanese government through the use of negative interest rates to encourage spending.

Under a weaker Yen which were caused by the reforms proposed through Abenomics, imported factor costs of materials such as food, oil and other natural resources, upon which Japan is highly reliant, were increased. By February 2013, the Abenomics policy implementations led to a significant depreciation of the Japanese yen and a 22% rise in the Tokyo stock market index. The Diet, under Abe’s leadership, took the stance that this issue was temporary in nature, as greater export volumes would eventually result from a weaker yen. Additionally, Japan was able to maintain an overall surplus current account due to additional levels of income from overseas investment.


To conclude, Japan faces a series of deflationary issues which has been attempted to be dealt with in a number of methods. However, these methods have not met their targets of closing the deflationary gap and stimulating additional consumption. This is evident in the significant devaluation of the yen, reducing Japanese consumers’ international spending power while contributing to greater levels of imported inflation. The impact on Japanese earning levels and consumer outlook seemed insignificant, with a poll in 2014 finding that almost three-fourths of respondents in Japan did not feel impacted by the effects of Abenomics. Only around a quarter of the surveyed respondents expected a pay raise, and nearly 70% were thinking of cutting back spending as a result of the higher consumption tax. Certain critics argue that factors such as an aging population and an increased dependence on imported sources of energy could have contributed to adverse changes in macroeconomic indicators such as a worsening of the Japanese trade deficit and continued levels of deflation. As such, Japan faces the problem of a weakening domestic demand which could be offset by bolder policy moves such as introducing an influx of foreign talent in order to organically increase workforce productivity and raise aggregate demand levels.

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Analysis of Japan’s Economic Policy. (2023, January 31). Edubirdie. Retrieved December 8, 2023, from
“Analysis of Japan’s Economic Policy.” Edubirdie, 31 Jan. 2023,
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