Japan has a highly developed market economy that is the 3rd largest in the world by GDP. It imports most of its energy and raw materials due to lack of natural resources. The economy is led by industries like engineering and R&D. Household consumption and government spending each make up over half of GDP, with services being the largest economic sector. While the economy experienced slow growth in recent decades, factors like technological adaptation and corporate loyalty helped fuel growth periods in the past.

1. 1
Chapter One
Overviewof Japan Economy
Japan is a country with highly improved economics from a few centuries ago. The economy of Japan is
totally market oriented with the flagship of third largest Nominal GDP in the world. This country is being
regarded as the second largest developed economy. The currency of Japan is called YEN. It is the Member
of many organizations which are leading the word economy such as APEC, WTO, G-7, G-20, G-8 and
many others. The Nominal and real GDP of Japan was $5.070 trillion & $5.632 trillion for the fiscal year
2017-18.
Japan has inadequate natural resources to support its growing economy and large population, and therefore
exports goods in which it has a comparative advantage such as engineering-oriented, research and development-
led industrial products in exchange for the import of raw materials and petroleum. Japan is among the top-three
importers for agricultural products in the world next to the European Union and United States in total volume
for covering of its own domestic agricultural consumption. Japan is the world's largest single national importer
of fish and fishery products. About 84% of Japan's energy is imported from other countries. Japan is the world's
largest liquefied natural gas importer, second largest coal importer, and third largest net oil importer. Given its
heavy dependence on imported energy, Japan has aimed to diversify its sources. Since the oil shocks of the
1970s, Japan has reduced dependence on petroleum as a source of energy from 77.4% in 1973 to about 43.7%
in 2010 and increased dependence on natural gas and nuclear power. Other important energy source includes
coal, and hydroelectricity is Japan's biggest renewable energy source.
GDP Composition in 2017
GDP Composition by End use
Household consumption: 55.9%
Government consumption: 19.5%
Investment in fixed capital: 23.5%
Investment in inventories: 0.2%
Exports of goods and services: 17.8%
Imports of goods and services: -16.8%
GDP Composition by sector
Agriculture: 1%
Industry: 29.7%
Services: 69.3%

2. 2
Some EconomicIndicators (2017)
 GDP $5.429 trillion
 Growth rate 1.7%
 GDP per capita $42,800
 Goss national savings 28% of GDP
 Industrial production growth 1.4%
 Labor force 65.01 million
 Unemployment rate 2.9%
 Population below poverty line 16.1%
 Budget revenue revenues: $1.678 trillion
 Budget revenue expenditures: $1.902 trillion
 Budget Surplus -4.6% of GDP
 Fiscal Year 1 April - 31 March
 Inflation rate .05%
 Export $683.3 billion
 Import $625.7 billion
 Foreign exchange and gold reserve $1.217 trillion
 Exchange rate 111.1 yen (JPY) per US dollar
Factors for Growth
One of the factors that the Japanese made use of their unique characteristic to expand the economy was to
improve and make practical use of technologies and technological know-how’s imported from foreign
countries. The Japanese were among the best at doing such a thing and often asserted that Japan has
produced very little technology of its own. However,Japan has created new technology, such as the low-
cost mass production systems, by combining numerous technologies imported from abroad.
The company unions demonstrated their loyalty in return for the favorable system and made the
management of employees easier.
Japan Economic Growth
Economic growth is an increase in the capacity of an economy to produce goods and services, compared
from one period of time to another. It can be measured in nominal or real terms, the latter of which is
adjusted for inflation. Traditionally, aggregate economic growth is measured in terms of gross national
product (GNP) or gross domestic product (GDP),

3. 3
GDP doesn't include unpaid services. It leaves out child care, unpaid volunteer work, or illegal black-
market activities. It doesn't count the environmental costs.For example, the price of plastic is cheapbecause
it doesn't include the cost of disposal.
The Phases of Japan EconomicGrowth
Capital Stock, Full Employment, Purchase Power Parity and Capital Spending are four important factors
for Japan economic growth. In the initial stages of development, Japanese government aimed at doubling
the incomes earned by their workers and improve their living standards. This was known as the Income
Doubling Plan, in 1960.
- The ability of its people to use foreign technology and skill to fit their own economic and industrial
system. The japanes are famous for their technology for a reason.
- Even during oil crisis in japan, they were able to control inflation with early monetary reforms.
- Improved their business environment and expanded foreign trade to their benefit.
The average Consumer Price Index (CPI) of Japan in April 2018 stood at 0.7% and this is a positive signal
given the country has battled deflation for many years.
ComparativeOverlookof JapanReal GDP and its
growth
The Gross Domestic Product (GDP) of an economy is a measure of total production. More precisely, it is
the monetary value of all goods and services produced within a country or region in a specific time period.
While the definition of GDP is straightforward, accurately measuring it is a surprisingly difficult
undertaking. Moreover, any attempts to make comparisons over time and across borders are complicated
by price, quality and currency differences.
The formula to calculate the components of GDP is Y = C + I + G + X.
That standsfor: GDP = Consumption + Investment + Government + NetExports, which are imports minus
exports.
Private Final Consumption Expenditure
Personal consumption expenditures is a measure of national consumer spending. It tells you how much
money Americans spend on goods and services.
The goods category includes two sub-categories. Consumer durable goods are long-lasting items, such as
cars and washing machines. Non-durable goods are items that households use quickly, like groceries and
clothing. Personal consumption drives almost 70 percent of economic output. That's measured by gross
domestic product. Personalconsumption is an important economic indicator. It’s the main workhorse that
drives economic growth, making it a key component of GDP.

4. 4
Graph 1.1: Private Final Consumption Expenditure in Japan 2001-2017
In this graph, we can see that Japan average consumption is close to 290000 billion YEN but at time of
Economic recession 2009-2011 its consumption went to 285000 bill YEN. It is very fortunate that this
amount was approximate to the normal condition.
275000.0
280000.0
285000.0
290000.0
295000.0
300000.0
305000.0
BillionsofJapanYEN
Fiscal year
PrivateFinal Consumption Expenditure in Japan 2000-2017

5. 5
Private Investment
Private investment, from a macroeconomic standpoint, is the purchase of a capital asset that is expected to
produce income, appreciate in value, or both generate income and appreciate in value. A capital asset is
simply property that is not easily sold and is generally purchased to help an investor to generate a profit.
Examples of capital assets include land, buildings, machinery, and equipment.
Graph 1.2: Real Private Investment in 2001-2017
The graph shows the ups and downs of japan investment amount in billion YEN for 2001-17.In the former
years, the private investment was higher than current years. From 2009-11 the investment was lower than
any others year.
Government Expenditures
Government spending or expenditure includes all government consumption, investment, and transfer
payments. In national income accounting the acquisition by governments of goods and services for current
use, to directly satisfy the individual or collective needs of the community, is classed as government final
consumption expenditure.
Government acquisition of goods and services intended to create future benefits, such as infrastructure
investment or research spending, is classed as government investment (government gross capital
formation).
These two types of government spending, on final consumption and on gross capital formation, together
constitute one of the major components of gross domestic product.
Government spending can be financed by government borrowing, or taxes. Changes in government
spending is a major component of fiscal policy used to stabilize the macroeconomic business cycle
0.0
5000.0
10000.0
15000.0
20000.0
25000.0
2000-01-01
2001-01-01
2002-01-01
2003-01-01
2004-01-01
2005-01-01
2006-01-01
2007-01-01
2008-01-01
2009-01-01
2010-01-01
2011-01-01
2012-01-01
2013-01-01
2014-01-01
2015-01-01
2016-01-01
2017-01-01
BillionsofchainedYEN
Axis Title
Real Privateinvestment(residential)

6. 6
Graph 1.3: Gov’t Final Consumption Expenditure in Japan 2001-2017
Net Export
Net exports are the value of a country's total exports minus the value of its total imports. It is a measure
used to calculate aggregate a country's expenditures or gross domestic product in an open economy. In
other words, net exports equal the amount by which foreign spending on a home country's goods and
services exceeds the home country's spending on foreign goods and services.
Graph 1.4: Real Net Export in Japan 2001-2017
This graph is showing that all the years,except 2008 and 2010, real net export was negative and that’s why
the curve is showing negative value for most of the year.
121
-18000.0
-16000.0
-14000.0
-12000.0
-10000.0
-8000.0
-6000.0
-4000.0
-2000.0
0.0
2000.0
4000.0
2001-01-01
2002-01-01
2003-01-01
2004-01-01
2005-01-01
2006-01-01
2007-01-01
2008-01-01
2009-01-01
2010-01-01
2011-01-01
2012-01-01
2013-01-01
2014-01-01
2015-01-01
2016-01-01
2017-01-01
BillionsinYEN
Fiscal Year
Real Net Exports of Goods and Services
0
20000000000000
40000000000000
60000000000000
80000000000000
100000000000000
120000000000000
1998-07-24 2001-04-19 2004-01-14 2006-10-10 2009-07-06 2012-04-01 2014-12-27 2017-09-22 2020-06-18
AmountinYEN
Fiscal Year
Gov't Final Consumption Expenditure

7. 7
Real GDP and Growth Rate
Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and
services produced by an economy in a given year,expressed in base-year prices,and is often referred to as
"constant-price," "inflation-corrected" GDP or "constant dollar GDP." Unlike nominal GDP, real GDP can
account for changes in price level and provide a more accurate figure of economic growth.
It is calculated using the prices of a selected base year. To calculate Real GDP, you must determine how
much GDP has been changed by inflation since the base year,and divide out the inflation each year. Real
GDP, therefore,accounts for the fact that if prices change but output doesn’t, nominal GDP would change.
Healthy Rate of Growth Is 2 Percent to 3 Percent
Year GDP real(in Bil. US$ PPP) GDP growth
2017 5428.8 1.7 %
2016 5243.1 0.9 %
2015 5128.9 1.4 %
2014 5006.1 0.4 %
2013 4899.5 2.0 %
2012 4727.1 1.5 %
2011 4573.2 −0.1 %
2010 4485.9 4.2 %
2009 4253.4 −5.4 %
2008 4463.1 −1.0 %
2007 4425.6 1.7 %
2006 4240.8 1.4 %
2005 4056.8 1.7 %
2004 3866 2.2 %
2003 3681.4 0.02%
2002 3555.1 0.1 %
2001 3497.2 0.4 %
Table 1.1: Real GDP and growth rate of Japan
Real Economic Growth Rate is the rate at which a nation's Gross Domestic product (GDP) changes/grows
from one year to another. GDP is the market value of all the goods and services produced in a country in a
particular time period.

8. 8
Real Economic Growth Rate takes into account the effects of inflation. Since inflation plays a key role in
the GDP of an economy, it is very important to ascertain the effects of inflation on GDP. As a result, the
Real Economic Growth Rate takes into account the buying power and is inflation-adjusted. This is the
reason it is considered to be a better measure of growth rate than the nominal growth rate.
Graph 1.5: Growth rate (real GDP)
This graph shows that the highest negative growth of japan GDP was 5.5% for 2009 at time of recession
and highest positive growth was 2.2% for 2004. The healthy GDP growth rate is one that is sustainable so
that the economy stays in the expansion phase of the business cycle as long as possible. GDP is the nation's
gross domestic product. That's the entire economic output for the past year. The GDP growth rate is how
much more the economy produced than in the previous quarter. The ideal rate is between 2-3 percent. If
the economy grows too slowly, or even contracts,it's obviously not healthy. But, if it grows too fast, that's
not ideal, either. In fact,if GDP growth starts spiking above 4 percent for several quarters, it usually means
there is an asset bubble. In the business cycle, the phase that follows expansion is the peak.
If nothing is done, the economy will go into a recession. That's because when the economy grows too fast,
it overheats. There's too much money chasing too few real growth opportunities. Investors start putting
excess money into mediocre investments. When they lose money, they panic. They start selling, causing
more investments to lose money. It doesn't end until prices are low enough to stop the madness and attract
investors again.
Real GDP and Nominal GDP
The main difference between nominal and realvalues is that realvalues are adjusted for inflation, while
nominal values are not. As a result, nominal GDP will often appear higher than realGDP.
Nominal values of GDP (or other income measures) from different time periods can differ due to changes
in quantities of goods and services and/or changes in general price levels. As a result, taking price levels

9. 9
(or inflation) into account is necessary when determining if we are really better or worse off when making
comparisons between different time periods. Values for real GDP are adjusted for differences in prices
levels, while figures for nominal GDP are not.
Nominal GDP can change from time to time because of two reasons:
 changes in the physical volume of output or
 changes in the prices at which output is valued
We want to use GDP to look at changes in the physical volume of output. Since Nominal GDP can also
change due to changes in the prices at which output is valued it is necessary to "deflate" the value recorded
for Nominal GDP (GDP with inflation) into "real" dollars so we can make comparisons across years.
Year GDP (in Bill US$ PPP) Nominal
2017 5428.8 5228.26
2016 5243.1 5049.42
2015 5128.9 4939.438
2014 5006.1 4821.175
2013 4899.5 4718.512
2012 4727.1 4552.481
2011 4573.2 4404.266
2010 4485.9 4320.191
2009 4253.4 4096.279
2008 4463.1 4298.233
2007 4425.6 4262.118
2006 4240.8 4084.145
2005 4056.8 3906.942
2004 3866 3723.19
2003 3681.4 3545.409
2002 3555.1 3423.775
2001 3497.2 3368.013
Table 1.2: Real vs Nominal GDP

10. 10
Graph 1.6: flow of Real vs Nominal GDP
Nominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP will include all of the
changes in market prices that have occurred during the current year due to inflation or deflation. Inflation
is defined as a rise in the overall price level, and deflation is defined as a fall in the overall price level. In
order to abstract from changes in the overall price level, another measure of GDP called real GDP is often
used. Real GDP is GDP evaluated at the market prices of some base year.

11. 11
Chapter Two
Business Cycle of Japan
Japan's free market economy is the third biggest in the world. It has the largest electronics industry
and the third largest automobile industry. Their economy is well-known by its efficiency and
competitiveness in exports, but productivity is lower in areas such as agriculture, distribution, and
services. Today, this country now relies on domestic demand and domestically oriented investment
to grow. For Japan to continue exporting their products, the country has now become dependent
on large fiscal deficits because their export sectors cannot grow fast enough to keep up with private
internal demand. Their prime minister, Shinzo Abe, also promises to change Japan’s economy by
increasing prices to defeat deflation. He believes this massive spending spree will ultimately add
600,000 available jobs. Their economy is still growing despite the huge debt on their shoulders.
The gross development debt is now estimated at approximately 235 percent GDP. If Japan does
not act soon, Japan will run out of sufficient savings to buy the new debt.
Japan’s Recession
Japan’s economy struggled during 1986 to 1991due to a recession that was caused by real estate
and stock prices inflating. This collapse lasting for longer than a decade and despite when real
estate prices began to rise again in 2003 the real estate yet again plummeted downward during the
global crisis in 2008. This global crisis was considered to be one of the worst financial crisis ever
recorded for Japan. It resulted from a number of things, such as; a total collapse of financial
institutions, the bailout of banks, and downturns in stock markets around the world. This crisis
effected the Japanese in a very negative way, it caused consumer wealth to decrease dramatically,
it was responsible for the failure of many businesses, and in retrospect, and this crisis played a key
role in the downturn of economic activity leading to the 2008-2012 global recession.
Japan’s Economy Expansion
Japan has gone through two periods of economic development. The first sign of economic
development was spotted in 1868 and it extended through World War II. The second sign of
development began in 1945 and continued into the mid-1990s. In both periods, the Japanese
opened themselves to Western ideas and influence. They experienced revolutionary social,
political, and economic changes. This eventually led Japan to become a world power. During both
periods, the Japanese government encouraged economic change by fostering a national revolution
and proposed the need to plan/advise in every aspect of society. The economic goal Japan desired
to accomplish was to make Japan so powerful and wealthy that its independence would never again
be threatened.

12. 12
Various phase of Japan’s BusinessCycle
Phase One: Launch
Each company begins its operations starting operations as a business and usually by launching new
products or services. During the launch phase, sales are low, but slowly (and hopefully steadily)
increasing. Businesses focus on marketing to their target consumer segments by advertising their
comparative advantages and value propositions. However, as revenue is low and initial startup
costs are high, businesses are prone to incur losses in this phase. In fact, throughout the entire
business life cycle, the profit cycle lags behind the sales cycle and creates a time delay between
sales growth and profit growth. This lag is important as it relates to the funding life cycle, which
is explained in the latter part of this article. Finally, the cash flow during the launch phase is also
negative but dips even lower than the profit. This is due to the capitalization of initial startup costs
that may not be reflected in the business’ profit but that are certainly reflected in its cash flow.
Phase Two: Growth
In the growth phase, companies experience rapid sales growth. As sales increase rapidly,
businesses start seeing profit once they pass the break-even point. However, as the profit cycle still
lags behind the sales cycle, the profit level is not as high as sales. Finally, the cash flow during the
growth phase becomes positive, representing an excess cash inflow.
Phase Three: Shake-out
During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either
approaching market saturation or the entry of new competitors in the market. Sales peak during
the shake-out phase. Although sales continue to increase, profit starts to decrease in the shake-out

13. 13
phase. This growth in sales and decline in profit represents a significant increase in costs. Lastly,
cash flow increases and exceeds profit.
Phase Four: Maturity
When the market matures, sales begin to slowly decrease. Profit margins get thinner, while cash
flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind
the business, and therefore cash generation is higher than the profit on the income statement.
However, it’s important to note that many businesses extend their business life cycle during this
phase by reinventing themselves and investing in new technologies and emerging markets. This
allows for companies to reposition themselves in their dynamic industries, and hence refresh their
growth in the marketplace.
Phase Five: Decline
In the final stage of the business life cycle, sales, profit, and cash flow all decline. During this
phase, companies accept their failure to extend their business life cycle by adapting to the changing
business environment. Firms lose their competitive advantage and finally exit the market.

14. 14
Corporate Funding Life Cycle
In the funding life cycle, the five stages remain the same but are placed on the horizontal axis.
Across the vertical axis is the level of risk in the business; this includes the level of risk of lending
money or providing capital to the business.
While the business life cycle contains sales, profit, and cash as financial metrics, the funding life
cycle consists of sales, business risk, and debt funding as key financial indicators. The business
risk cycle is inverse to the sales and debt funding cycle.

15. 15

16. 16
Investment
In an economic sense, an investment in the purchase of goods that are not consumed today but use
in the future to create wealth. The major components of private spending, after consumption is
investment. Investment plays two roles in macroeconomics.
Determinants of Investment
Various goods and services are produced by an economic system. These are divided into two broad
categories, viz., consumer goods and capital goods. Consumer goods are those which satisfy wants
directly. By contrast, goods that satisfy wants indirectly — for example, a textile producing
machine or a tractor—are classified as producer goods.
Expenditure on producer goods is known as investment or capital formation. This is also known
as real investment which is different from financial (paper) investment, e.g., when someone
‘invests’ in the purchase of shares, hi economics, buying shares is to be treated as saving and the
term ‘investment’ is used to focus on the role of real
Three Elements of Investment:
Business firms make investment in the following three ways. The basic objective is to produce
saleable goods to make profit.
1. To replace existing capital:
Capital goods wear out through use and have to be replaced. So, a firm has to make provision for
depreciation, i.e., reduction in the value of capital goods due to their contribution to the production
process. At any fixed time, there will be some investment which is needed to replace worn-out
capital.
2. To expand capacity:
If the amount of total (gross) new investment taking place happened to just equal the amount of
depreciation, the size of the stock of capital employed would remain constant. Any excess of gross
investment over depreciation represents net investment in expanded capacity or net capital
formation.

17. 17
Net investment is needed to introduce new products and groups of products or to produce existing
products on a much larger scale. In a period of rising demand for goods and services existing
capacity will be fully utilized and there will be need for fresh investment.
3. To increase efficiency:
To survive in a competitive world, firms will be under constant pressure to raise productivity of
resources, especially labor power. This can be achieved through process of innovation, i.e.,
introduction of new production processes.
This is often associated with the application of new technology. In fact, the greater the pressure
and scope for increased efficiency, the larger the volume of investment firms are likely to
undertake if they are to survive and expand.
Investment $000 billion
Year Q1 Q2 Q3 Q4
2001 27.8 25.7 26.2 26.5
2002 24.8 23.2 24.8 25.7
2003 24.6 23.2 24.8 25
2004 24.7 23 24.7 25.2
2005 25.1 23.5 25.2 25.1
2006 25.2 23.5 24.9 25.3
2007 25.7 23.3 24.2 24.4
2008 24.6 23.7 24.2 25.7
2009 23.2 20.4 21.2 21.6
2010 19.8 21.5 22.2 22.7
2011 20.7 22.2 22.8 23.6

18. 18
2012 21.2 22.8 23.1 23.5
2013 21.3 23.5 24.5 24.9
2014 22.8 23.9 24 25
2015 23.8 24 24.2 24.3
2016 22.7 23.5 23.8 24.5
2017 24.5 22.8 24.2 24.6
Table 2.1: The amount of investment from 2001 to 2017 in each quarter.
Graph 2.1: The investment condition of Japan from last 17 years.
From the above table and graph, we see the investment amount of Japan from 2001 to 2017 in
every quarter. Here we see, the investment condition of Japan is quietly decent. But in 2009 and
2010 due to economic recession the investment was quietly fallen down. In every year in second
quarter investment amount is quite less than the other quarters. Due to company’s spending picked
up, highlighting a long-awaited bounce in domestic demand.

19. 19
Consumption:
Consumption can be defined in different ways, but it is best described as the final purchase of goods and
services by individuals. The purchase of a new pair of shoes, a hamburger at the fast food restaurant or
services, like getting your house cleaned, are all examples of consumption. It is also often referred to as
consumer spending. Many topics in economics explore how the income of families and individuals affects
consumption and spending habits.
Theories on Consumption
There are many different theories on income and consumption behavior, and we will focus on
some of the more mainstream concepts in consumption theory.
Keynesian Theory and Real Income
One of the most popular and well-known theories is the Keynesian theory, offered by economist
John Maynard Keynes. This theory states that current real income is the most important
determinant of consumption in the short run. Simply said, you spend according to how much
income you have coming in. This is the basis for most consumption theory.
The term 'real' that is used in describing income refers to how your income is affected by inflation,
or the natural rise in prices of goods and services. So to elaborate, if your income went up five
percent in a year, but the price of goods or inflation went up five percent also, your real income
remained flat. You can't really buy or consume any more goods than you could before.
States Affecting Consumption

20. 20
So what else do economists believe affects consumption and your decision to purchase products
and services, besides your real income?
 Prices - If prices are higher, then a person's total level of consumption will be lower,
because consuming will use up a higher percentage of a person's income.
 Taxes - As taxes on goods and services (sales taxes) rise, people may not be able to afford
as much as they used to and, as a result, will consume less. The income tax rates you pay
also affect your ability and decision to consume. Higher tax rates lead to less disposable
income, which is money you have left over for spending and savings after you pay taxes.
 Saving - People generally have two things they can do with their money. They can save or
they can spend. The more money people save, the less they have to consume in the short-
run.
 Consumer confidence - If people are worried about the economy or their own future
income, they may delay making purchases in order to provide some safety and extra cash
for future expenses. They will save or delay their consumption until they feel better about
what lies ahead.
Graph 2.2: The private consumption condition of Japan from last 17 years.
$000 consumption
(government)
Year Q1 Q2 Q3 Q4

21. 21
2001 16.5 16.2 18.8 18.5
2002 17.6 16.5 19.5 18.6
2003 17.5 16.8 19.8 18.7
2004 17.2 16.7 19.7 18.7
2005 17.2 16.7 19.8 19.4
2006 16.8 19.3 16.7 16.7
2007 18.7 19.5 16.9 18.5
2008 18.6 16.7 17.2 18.7
2009 19.2 16.9 17.8 19.2
2010 19.8 17.4 17.9 20.8
2011 22 18.6 20.2 21.7
2012 21.8 18.1 20.1 21.2
2013 21.8 18.5 18.9 20.7
2014 21.7 18.7 17.2 20.2
2015 21.2 18.3 16.1 20.1
2016 21.1 19.3 16.9 21.6
2016 20.2 16.5 17.8 19.2
2017 20.4 16.8 17.9 19.5
Table 2.3: The amount of government consumption from 2001 to 2017 in each quarter.

22. 22
Graph 2.3: Government consumption in Japan from last 17 years.
From the above table and graph, we see government consumption condition of Japan from 2001 to 2017 in
every quarter. In early years from 2001 to 2009 government consumption is less than the following years.
In response to chronic deflation and low growth, Japan has attempted economic stimulus and
thereby run a fiscal deficit since 1991.[18] These economic stimuli have had at best nebulous effects
on the Japanese economy and have contributed to the huge debt burden on the Japanese
government. Expressed as a percentage of GDP, at 240% Japan has the highest level of debt of
any nation on earth.[18] While Japan's is a special case where the majority of public debt is held in
the domestic market and by the Bank of Japan, the sheer size of the debt demands large service
payments and is a worrying sign of the country's financial health.

23. 23
Chapter Three
Overviewof Japan Unemployment
Unemployment or joblessness is the situation of actively looking for employment but not being currently
employed. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as
a percentage by dividing the number of unemployed individuals by all individuals currently in the labor
force. During periods of recession, an economy usually experiences a relatively high In addition to these
comprehensive theories of unemployment, there are a few categorizations of unemployment that are used
to more precisely model the effects of unemployment within the economic system. Some of the main
types of unemployment include structural unemployment and frictional unemployment, as well as cyclical
unemployment, involuntary unemployment, and classical unemployment. Structural unemployment
focuses on foundational problems in the economy and inefficiencies inherent in labor markets, including a
mismatch between the supply and demand of laborers with necessary skill sets. Structural arguments
emphasize causes and solutions related to disruptive technologies and globalization. Discussions of
frictional unemployment focus on voluntary decisions to work based on each individuals' valuation of
their own work and how that compares to current wage rates plus the time and effort required to find a
job. Causes and solutions for frictional unemployment often address job entry threshold and wage rates
unemployment rate.
Table 3.1: Unemployment rate of Japan
From that table, we see in 2002 is the highest unemployment rate 5.62% and lowest
unemployment rate 2.97%. Here we see, the unemployment rate of Japan is gradually
decreasing. It helps to rise Japan GDP.
Year Unemployment Rate:
2000-01-01 4.93
2001-01-01 5.24
2002-01-01 5.62
2003-01-01 5.48
2004-01-01 4.93
2005-01-01 4.63
2006-01-01 4.32
2007-01-01 4.01
2008-01-01 4.16
2009-01-01 5.32
2010-01-01 5.32
2011-01-01 4.81
2012-01-01 4.56
2013-01-01 4.23
2014-01-01 3.74
2015-01-01 3.53
2016-01-01 3.28
2017-01-01 2.97

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Graph 3.1: Unemployment rate of Japan
This graph shows the employment rate of japan is growing day by day . We know that if
unemployment rate is decreased by 1% point then the overall GDP will grow by 2%(according to
the Okun’s law).We noticed that japan GDP growth rate was 1.7% for 2017 from which we
relate the application of Okun’s Law in respect of Japan Economy.
Applicationof Okun’s Law in Japan
Okun’s Law describes how unemployment changes according to how much a country’s gross
domestic product (GDP) grows or contracts. The sum of a country’s unemployment and inflation
rates over a specific period. Even though unemployment declines when GDP grows, and rises
when GDP shrinks, it lags behind the output figures.
According to Okun’s Law, a one-point rise in the cyclical unemployment rate is linked to a 2-
percentage point decline in real GDP. This relationship varies, depending on when and in which
country this occurred. Remember that percentage point and percent have quite different
meanings.
This unemployment consists of structural and frictional unemployment and is not linked to the
business cycle. Frictional unemployment refers to unemployment due to individuals being in the
process of moving from one job to another.
0.00
1.00
2.00
3.00
4.00
5.00
6.00
U
n
e
m
p
l
o
y
m
e
n
t
r
a
t
e
Fiscal year
Unemployment Rate:

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Graph 3.2: Okun’s
Law and Japan GDP
According to the Okun’s Law,whenever output grows 2% faster than potential GDP, the unemployment
rate declines 1% point. This graph shows that unemployment of japan changes are well predicted by
GDP growth.
YEAR Unemployment GDP growth
2001 5% 4%
2002 5.40% 1%
2003 5.20% 1.50%
2004 4.70% 2.20%
2005 4.40% 1.70%
2006 4.10% 1.40%
2007 3.80% 1.70%
2008 4.00% -1.00%
2009 5.10% -5.40%
2010 5.10% 4.20%
2011 4.60% -0.10%
2012 4.30% 1.50%
2013 4.00% 2%
2014 3.60% 0.40%
2015 3.40% 1.40%
2016 3.10% 0.90%
2017 2.90% 1.70%
Table 3.3: Unemployment and GDP growth
This is the actual scenario of japan unemployment and GDP growth where they expressed inverse
relationship between them.
y = -0.0012x + 2.3817
y = -0.0006x + 1.2718
-6%
-4%
-2%
0%
2%
4%
6%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Unemployment
GDPgrowth
Okun's Law
unem Gdp growth unem
Linear (unem) Linear (Gdp growth)

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Inflationand Unemployment
How inflation and unemployment are related
The relationship between inflation and unemployment has traditionally been an inverse
correlation. However, this relationship is more complicated than it appears at first glance and has
broken down on a number of occasions over the past 45 years. Since inflation and
(un)employment are two of the most closely monitored economic indicators, we'll delve into
their relationship and how they affect the economy.
Supply and Demand for Labor
If we use wage inflation, or the rate of change in wages, as a proxy for inflation in
the economy, when unemployment is high, the number of people looking for work significantly
exceeds the number of jobs available. In other words, the supply of labor is greater than the
demand for it.
With so many workers available, there's little need for employers to "bid" for the services of
employees by paying them higher wages. In times of high unemployment, wages
typically remain stagnant, and wage inflation (or rising wages) is non-existent.
In times of low unemployment, the demand for labor (by employers) exceeds the supply. In such
a tight labor market, employers typically need to pay higher wages to attract employees,
ultimately leading to rising wage inflation.
Over the years, economists have studied the relationship between unemployment and wage
inflation as well as the overall inflation rate.
Implications of the Phillips Curve
Low inflation and full employment are the cornerstones of monetary policy for the modern
central bank. For instance, the U.S. Federal Reserve's monetary policy objectives are maximum
employment, stable prices, and moderate long-term interest rates.
The tradeoff between inflation and unemployment led economists to use the Phillips Curve to
fine-tune monetary or fiscal policy. Since a Phillips Curve for a specific economy would show an
explicit level of inflation for a specific rate of unemployment and vice versa, it should be
possible to aim for a balance between desired levels of inflation and unemployment.
Table 3.3: Inflation and unemployment rate .
Year Inflation Unemployment
2001 -0.70% 5%
2002 -0.90% 5.40%
2003 -0.20% 5.20%

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2004 0.10% 4.70%
2005 -0.30% 4.40%
2006 0.20% 4.10%
2007 0.00% 3.80%
2008 1.40% 4.00%
2009 -1.40% 5.10%
2010 -0.70% 5.10%
2011 -0.30% 4.60%
2012 -0.10% 4.30%
2013 0.30% 4.00%
2014 2.80% 3.60%
2015 0.80% 3.40%
2016 -0.10% 3.10%
2017 0.50% 2.90%
Table 3.2: Inflation and Unemployment
Graph 3.3:
This graph shows
the economic expansion of Japan leads to an inflationary surprise and upward shift in Phillips curve
y = 0.0008x- 0.0066
y = -0.0012x +0.0532
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
2 0 0 12 0 0 22 0 0 32 0 0 42 0 0 52 0 0 62 0 0 72 0 0 82 0 0 92 0 1 02 0 1 12 0 1 22 0 1 32 0 1 42 0 1 52 0 1 62 0 1 7
INFLATIONRATE
UNEMPLOYMENT
PHILLIPS CURVE
inflation unem Linear (inflation) Linear (unem)

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Chapter Four
Money Supply and Quantity Theory of Money According to
Japan Economy:
Quantity theory of money states that money supply and price level in an economy are in direct
proportion to one another. When there is a change in the supply of money, there is a proportional
change in the price level and vice-versa. The quantity theory of money (QTM) is the oldest
quantitative relationship that has been considered in economics. To show the relationship
between money supply and nominal GDP we use this simple equation
M*V = P*Y(T)
Where
M =All the money supply in the economy
V=Velocity of circulation (How many time a dollar is spent purchasing finished
Goods and services)
P= Price level (The price level of all the goods and services in the economy)
T= All transactions (all the goods and services in the economy)
A look at the Japanese nominal gross domestic product (GDP) and the money supply (M2 base)
in recent years shows that whereas the money supply continued to increase from the mid-1990s
until recently, nominal GDP has been flat. Such a long-term deviation between nominal GDP and
the money supply seems highly irregular as economic growth typically indicates additional
demand for financing. If the money supply increases sharply, financial assets and real estate prices
rise while exchange rates fluctuate, and such trends are expected to have an impact on economic
growth as well. In the major economies of Europe and North America, nominal GDP and money
supply grow together. Now we explain quantity theory of money of japan with below data. We
take the data with close estimation
Japan Nominal GDP, money supply and money velocity from 2001 to 2018
Year Nominal GDP
(Billion Dollar)
Money Supply
(JPYN)
Money Velocity
2001 3421.20 1005966041666670 9.286
2002 3555.10 1019775216666670 9.139
2003 3681.40 1020172191666670 9.994
2004 3866.00 1028025708333330 9.083
2005 4056.80 1032102075000000 9.501
2006 4240.80 1029061116666670 10.047

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2007 4425.60 1032533083333330 10.526
2008 4463.10 1040595766666670 10.273
2009 4253.40 1059317800000000 8.825
2010 4485.90 1081731208333330 8.606
2011 4473.20 1105949458333330 7.750
2012 4727.10 1130021316666670 7.002
2013 4899.50 1163212725000000 6.585
2014 4006.10 1194761200000000 6.225
2015 5128.90 1230526883333330 6.029
2016 5243.10 1265643066666670 5.757
2017 5428.80 5.549
2018 5567.28 5.880
Table 4.1: Japan Nominal GDP, money supply and money velocity
Suppose japan yearly money supply is jyn 600 billion, money velocity is 8, price level is jyn 5 and
transaction is jyn 960 billion. So equation is
MV = PT
600*8 = 5*960
4800 = 4800
When M increase by 50 %, then M rises to 900. Then P will increase by 50 % from 5 to 7.5
MV = PT
900*8 = 7.5*960
7200 = 7200
P = MV/T or P = 7200/960 or P = 7.5
Monetary and Fiscal Policy According to Japan Economy:

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Monetary policy pertains to the regulation, availability, and cost of credit, while fiscal policy deals
with government expenditures, taxes, and debt. Through management of these areas, the Ministry
of Finance regulated the allocation of resources in the economy, affected the distribution of income
and wealth among the citizenry, stabilized the level of economic activities, and promoted economic
growth and welfare.
The Ministry of Finance played an important role in Japan's postwar economic growth. It
advocated a "growth first" approach, with a high proportion of government spending going to
capital accumulation, and minimum government spending overall, which kept both taxes and
deficit spending down, making more money available for private investment. Most Japanese put
money into savings accounts, mostly postal savings.
According to japan economy, we can implement monetary and fiscal policy effect. At first, from
this equation (T E = C + I + G) we can see that
TE = Government Total Expenditure
C= Consumption expenditure
I= Gross private domestic investment
G= Government purchases of goods and services
From Japan economy we can see that, in the middle of 2000 to 2017 they feel money supply
crisis. For recovering this money, they increased tax and took debt from other sources. As a
result of increasing interest cost and tax cost, their consumption in overall economy was
increased and

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From their economy recently we can see that consumption expenditure is 334396 JPY billion and
investment expenditure is 1621 JPY billion and government expenditure is 107015 JPY billion for
a particular year. By estimating the data we draw consumption curve.
Between March 2001 and December 2004, Japanese banks received 35.5 trillion yen in liquidity
injections. The bank also targeted long-term government bond purchases, which lowered yields
on assets.
Economic growth seemed to return between 2002 and 2007. However, as with most of the world,
Japan's growth vanished during the Great Recession. Though Japan was slower to start a new round
of QE than Europe or the United States, the BOJ launched quantitative and qualitative monetary
easing (QQE) in 2013. As with most expansionary monetary policies, QQE failed to work.
More than 80 trillion yen in purchases was not enough and, in October 2014, the BOJ announced
QQE2. Japanese stocks climbed 33% in the ensuing eight months, but there was still little evidence
of real growth. Desperate, the BOJ announced negative interest rates in January 2016.

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