Business Environment in Japan

Country Information Background

Japan is located on the Asian continent and has one of the most stable economies in this region. The annual average population growth rate in Japan stands at 1.9%, and this is projected to reach 130 million in 2018. The annual average GDP growth rate is 2.8, and the population’s purchasing power stands at $4,210 (OECD par. 13). At present, the manufacturing industry accounts for over 60% of the total export earnings. This accounts for 43% of the GDP and 62% of the budget revenues (World Bank 22). Japan has an extensive road transport network, sea transport network, and a modernized air freight system (Heritage Foundation par. 5). At present, 37% of those in the above age bracket are in active employment. Surprisingly, the Gini coefficient of Japan stands at 0.47, which is almost 0.1 higher than the UN recommended coefficient ratio. 21.5 million Japanese still face shortages in basic needs (World Bank 31).

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Fiscal and Monetary Policy

Fiscal Policy

The Policy Research Council, under the Ministry of Finance, is the main government body mandated to formulate the country’s fiscal policies. In the last decade, Japan has reduced its public debt. In detail, as a percentage ratio of public debt to GDP, the Japanese government had reduced public debt from 23.9% in 2008 to 11.9% in 2014. The rate of public debt, as a percentage of GDP, should be negligible in 2018 because the government currently maintains a surplus budget due to growth explosion after the 2007/2008 global financial meltdown. Therefore, there should be no need for future borrowing (The Economist par. 6).

Japan’s government expenditure has mainly focused on expanding the economic sector to create more jobs, especially in the manufacturing industry. The 2014 budget showed that the government had a projected expenditure of $298 billion. In 2015, the government expected to spend at least $240 billion. Apparently, this expenditure should not create any deficits or surpluses. However, depending on the current account performances of the past two years, the possibility of the surplus is high. The public expenditure for 2015 should represent about 38% of the country’s GDP (Ali 19).

Monetary Policy

The Japanese money supply has been relatively optimistic in recent months as the rate of inflation has dropped by 6% (OECD par. 12). Following the increased demand for heavy industry products across the globe and strengthening domestic demand for goods and services, the Policy Research Council observed that the rate of deposit growth reached 14% in 2014 (World Bank 25). The rate of liquidity is expected to remain high in the short foreseeable future because the current market reforms by the government favor increased money supply. For example, the Ministry of Finance has introduced different market reforms that have increased bank reserves around the country. These reforms should sustain time and savings deposits in 2015. The sustained growth of monetary aggregates has remained at an average of 10% since the year 2009, immediately after the global financial crisis (The Economist par. 19).

This sustained growth stems from stable interest and exchange rates. For example, economic reforms have ensured interest rates remain relatively stable and favorable in 2015 because the government’s monetary policies aim to encourage more private sector growth to support its goal of diversifying the economy from excessive dependence on the manufacturing sector. Existing monetary policies favor liquid non-interest bearing deposits that should further increase the rate of money supply in the coming months to support the same cause (Howe 28).

Since the Policy Research Council pegged the performance of the Japanese Yuan to the US dollar, the future performance of the money market will similarly depend on the performance of the US economy since most of the manufacturing exports are absorbed by the western market. Considering the American economy is showing marginal economic improvements (from the 2007/2008 global financial crisis), the performance of the US economy and the Yuan currency should equally reflect the same positive performance in 2015 as the positive growth has been recorded in the US economy. Therefore, the money supply and interest rates should be relatively stable in the next short foreseeable future (OECD par. 13).

Current State of the Economy

The rate of inflation in Japan has remained relatively low since the year 2010. This stability has led to minimal changes in the price of goods and services. Similarly, the continued subsidization of basic products and essential services should increase the rate of inflation as the national population increases. Particularly, the optimistic outlook of the US dollar should not increase the rate of inflation beyond the influences of the domestic market because the pegged pricing regulations insulate the domestic currency from further inflationary pressures (The Economist par. 23).

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Current Ruler and Politics

Japan has historically had a favorable political climate. Evidentially, there is a high sense of political tolerance in Japan since it operates on a democratic political system in addition to the ceremonial monarch arrangement. This system has had a positive effect on the economy because Japan enjoys strong political stability. The country has had several successful democratic elections under its parliamentary system of governance. The current ruler of the state operates under a popular party system that is characterized by guided democracy and relative stability in the government. Since there are no foreseeable forces that would destabilize the political harmony currently existing in Japan, political risk should remain relatively low, if not negligible, in the foreseeable future (Heritage Foundation par. 8).

Comparative Advantage

Since Japan in a manufacturing economy, most of its exports are industrial products. However, in the non- manufacturing sector, the Japanese economy exports sea products as its major foreign exchange earner. The sea products account for about 15% of the country’s total non-industrial export volumes. Other significant exports include plastics, transport equipment, and electrical equipment. Japan imports are mainly chemical and medicine (World Bank 35).

Japan’s position as an export country has characterized its history since the value of imports has been significantly lower than the value of exports since the 1980s. A closer analysis shows that the gap between imports and exports often has varied, but the value of the country’s exports has consistently remained higher (buoyed by increased industrial exports). Because the global economy remains heavily reliant on industrial products, Japan should remain an export country in the next foreseeable future. However, this situation may change in the future, as the non-industrial sectors grow (Trading Economics par. 12).

Investment Possibilities, Risk Factor, Natural Resources

Based on strengthening consumer confidence and increased project financing, the Japanese stock market presents a positive trajectory that is ideal for investment. This trajectory should boost dividend yields, initial public offerings (IPOs), and return on investment, as seen in Jan 2015, when the main index increased by 4.3%. Concerning IPOs, CMA reported a 93% and 48.3% increase in IPO offerings in the years 2015 and 2014, respectively (CMA 12). These financial statistics show that the momentum for stock market vibrancy is already high, and the same trend should continue in the next year. The risk factor in this market is the uncertain effects of policy changes and the global economic uncertainties, which could cause declining trading volumes, thereby limiting the potential for investment returns. This risk is relatively high since the economy of Japan depends heavily on foreign exchange from industrial exports (Park 15).

Focus of Investment

From the above analysis, the focus of investment should be on the stock market through buying shares since its performance has been consistent in the last three years. The trend is expected to remain the same in the foreseeable future since the demand for export products from Japan continues to grow (The Economist par. 7)

Overall Condition of the Country

This report shows that the future of the Japanese economy is positive. Although some sectors of the economy should grow faster than others do, the overall outlook of the economy is positive. Government policies outline the backbone of this growth because they provide the guidelines for future economic expansion, through the Ministry of Finance. Government policies also play a significant role in stabilizing the country’s exchange rates, unemployment rates, and current account balances since the Japanese economy operates in a hybrid market system (Curran and Acker 21). Therefore, the positive economic future of Japan should ride on the back of public expenditure and supportive government policies. Despite the swings in economies of the neighboring countries, Japan has remained stable for the last ten years, and the trend is predicted to be the same in the foreseeable future (Asafu-Adjaye 430).

Works Cited

Asafu-Adjaye, Jordan. “International trade and sustainable development in Sub-Sahara Africa.” International Journal of Social Economics, 31.4 (2004): 417–429. Print.

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CMA. Publication and Reports: Annual Reports. 2015. Web.

Curran, G., & Acker, E. (2010). Business and the politics of globalisation: after the global financial crisis. Alabama: Pearson Education. Web.

Heritage Foundation. Quick Facts: Japan. 2015. Web.

Howe, Christopher. The Origins of Japanese Trade Supremacy. London, Hurst & Company, 2010. Print.

OECD. Japan: Economic forecast summary. 2015. Web.

Park, Gerald. Monetary Management in GCC Countries, IMF Staff Papers: Washington DC, 2009. Print.

The Economist. Taking Lessons from Japan. 2015. Web.

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Trading Economics. Japan GDP growth rate. 2015. Web.

World Bank. GDP Growth: Japan. 2015. Web.

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