Elliot & Associates Research Global Markets: Japan at the Economic Crossroads

By: Eli Pika

Around May of this year, the Japanese economy was showing fairly modest signs of resiliency in spite of the current fiscal tightening. In particular, improving labor market and increasing investment confidence has helped to propel expansion although such an expansion has been greatly affected by the export slump. With growing world trade, however, annual growth is expected to reach 1¼%, triggering more expansion and an increase in inflation rate.

Bloomberg News reported back in May that “with gross public debt surpassing 230% of GDP, a detailed and credible fiscal consolidation plan to achieve the target of a primary budget surplus by FY 2020 remains a top priority to sustain confidence in Japan’s public finances.” Japan has planned a two-year sales tax hike beginning in 2014, with the 10%-target scheduled to be imposed in 2015.

In the Second Quarter of 2014, however, Japan’s GDP fell 1.8%, a result of an annualized 7.1% shrinking in the three months through June, according to the Cabinet Office in Tokyo. This was the biggest since 2009 and has put the burden of the economy upon Prime Minister Shinzo Abe’s ability to manage the country under the present and looming dire sales-tax conditions.

In the next quarter, retail sales and consumer spending fell in July, an obvious aftershock of the imposed sales-tax hike. With the next tax levy set in October 2015, the government is getting ready to boost the economic stimulus in order to lessen the impact upon consumers. According to Finance Minister Taro Aso in the first week of September 2014, a contingency stimulus plan will be prepared for that purpose.

Prime Minister Abe, according to Bloomberg News, is working to create “a sustained recovery after the central bank’s record stimulus brought initial success in fighting off two decades of economic stagnation.” In spite of the official optimism, the economy faltered in the Third Quarter, with the dismal increase in industrial production in July and August as car sales dropped to a record low in three years.

Japan has to find a quick solution to its economic woes as the world prepares to enter into an era of a new Asia-Pacific political and economic cooperation system that is sure to put a lot of pressure upon individual member-nation to come out and compete aggressively against equally competitive and aggressive nations. However, the new system might also bring new hope and opportunities for everyone in general.

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