Written Economic Policy Report 3.2 (PAPER) - Fiscal Policy - Japan PDF

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RMIT International University VietnamASSIGNMENT COVER PAGECourse Code ECON 1192BCourse Name Macroeconomics 1Campus Saigon South School CampusSemester Sem 3 - 2021Title of Assignment Written Economic Policy Report3 (PAPER) - Fiscal Policy -JapanLecturer Pham Thi Thu TraAssignment Due Date 10 January ...

Description

RMIT International University Vietnam ASSIGNMENT COVER PAGE Course Code

ECON 1192B

Course Name

Macroeconomics 1

Campus

Saigon South School Campus

Semester

Sem 3 - 2021

Title of Assignment

Written Economic Policy Report 3.2 (PAPER) - Fiscal Policy Japan

Lecturer

Pham Thi Thu Tra

Assignment Due Date

10 January 2022, 23:59

Word Count

1356 Words (excluding reference and appendix)

1. Japan - Macroeconomic snapshot Japan's GDP from 2007 to 2021E, projected 2022 and 2023 6.0% 4.0% 4.1% 3.2%

2.0%

2.4%

2.0%

1.7% 1.6% 1.5% 1.4% 1.4% 0.0% 0.8% 0.6% 2019 0.3% 0.3% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 2021E 2022F 2023F 0.0% -2.0% -1.2% -4.0% -4.6%

-6.0%

-5.7%

-8.0%

a. GDP annual growth, unemployment and inflation rates % Figure 1: Japan’s GDP growth rate from 2007 to 2021 Source: The World Bank, IMF

Japan's inflation from 2007 to 2021E, projected 2022 and 2023 2.8%

3.0% 2.5% 2.0% 1.5% 1.0%

1.4% 0.8%

0.5%

1.0%

0.7% 0.5% 0.0% -0.2% 0.5% 0.5% 0.3% 0.0% 2007 2008 2009 2010 2011 2012 2017 2018 2019 2020 2021E 2022F 2023F 0.0% 2013 2014 2015 2016 -0.1% -0.5% -0.3%

0.0%

-1.0% -1.5%

-0.7% -1.3%

-2.0%

Japan’s GDP recorded the slowest growth rate in the great recession when shrinking to -5.7% in 2009 and recorded the highest growth in the year after with 4.1%. In 2020, the heavy negative growth rate repeated with -4.6% when Japan was strongly hit by the covid-19

Figure 2: Japan’s inflation rate from 2007 to 2021 Source: The World Bank, IMF

Japan's unemployment rate from 2007 to 2021E, projected 2022 and 2023 6.0% 5.0% 5.1% 5.0% 4.0% 3.9% 4.0%

4.6%

4.4% 4.0% 3.6%

3.0%

3.4%

3.1% 2.8%

2.8% 2.8% 2.4% 2.4%

2.0%

2.4% 2.3%

1.0% 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022F 2023F

During the global recession, Japan experienced the most deflation with -1.3% in 2009. In 2014, Japan recorded the highest inflation rate with 2.8%, this was beyond the target of 2%. Figure 3: Japan’s unemployment rate from 2007 to 2021 Source: The World Bank, IMF After reaching the peak in 2009 with a 5.1% unemployment rate, it started to reduce gradually, estimated at 2.8% in 2021 and projected to decrease to 2.4% in 2022 and 2.3% in 2023.

Japan's unemployment rate from 2007 to 2021E, projected 2022 and 2023 6.0% 4.0% 2.0% 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022F 2023F -2.0% -4.0% -6.0% -8.0% GDP growth %

Inflation %

Unemployment rate %

b. The correlation between GDP, inflation and unemployment rate Figure 4: Japan’s GDP, inflation and unemployment rate from 2007 to 2021 Source: The World Bank, IMF

In 2009, Japan experienced the most fall down in GDP with -5.7%, initially, the fall in GDP caused by the global recession, the consumption and investment decreased in domestic along with the international trade value also decreased cause the GDP to fell down, in the same period, Japan also experienced the highest unemployment rate of 5.1%. Besides, in 2014, after implementing a series of interest rate cut and stimulus packages to help the economy to recover, Japan experienced the highest inflation with 2.8%, this rate was higher than the target inflation of 2%. GDP growth also reached 0.3%, relatively low.

2. Fiscal policy analysis 2.1During the global financial crisis, GDP fell down the most in 2009 with -5.7%. The budget deficit situation from 2007 to 2019 0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

-100

trillion Yen

-200 -300 -400 -500 -600 -700

In the global great recession in 2008,2009, Japan was heavily impacted and faced challenges to recover quickly. Japan implemented a series of interest rate reductions as monetary policy, besides, fiscal policy was also applied to boost the consumption and investment, such as decrease in taxes and stimulus packages. As a result of the global financial crisis that started in 2008, Japan experienced a heavily negative growth rate of -5.7% in 2009. As an industrial production country with automobiles and equipment was two the main export goods, the fall in export and import significantly contributed to the negative GDP growth in 2009, particularly, export decreased -25.34% and import reduced -26.65% (OECD, n.d) Figure 5: Japan’s budget deficit situation from 2007 to 2019 Source: OECD 2021

To respond to the impact from the global financial crisis, Japan implemented the expansionary fiscal policy in order to stimulate the economy to recover. In 2009, the Japanese government reduced its tax rate 1.1% and increased the government spending up to 101T yen, equivalent to the increase of 19.24% year-on-year. To support the economy, Japan released stimulus packages

of 36.2T yen in total, particularly, 2T yen which was as cash transfer, 0.9T to fund welfare services, 1T in tax deferred for small enterprises. Moreover, 2.3T yen was to support basic pension and the support of 30T yen as capital injection (IMF 2014) Japan’s budget situation has been in a deficit position since 2007, the budget was deficit at -231T yen in 2008, increasing deeper to -536T yen in 2009. On average, government spending accounted for about 18.26% gross domestic products, in 2009, the contribution was increased to 19.56% in GDP due to the significant spending. In 2008, the government debt to GDP was 185%, however, during the expenditure during recession, the ratio increased to 205% in 2009. The ratio was significantly higher than other advanced countries such as Europe (OECD n.d)

Figure 6: illustration of AS AD expansionary fiscal policy

Theoretically, the tax reduction will increase the disposable income, hence the consumption increase, investment also goes up. As a result, in the short run, the aggregate demand increases to help the nation to increase the output as GDP grows positively, however, the price level (inflation) also increases. Likewise, with the increase in government expenditure, the aggregate demand would be increased, due to the contribution of government expenditure being significant (19.56% to total GDP), the increase in government spending boosts the GDP to grow up, then the price level (inflation) also increases. To illustrate, when the tax decreases and government spending increases, the aggregate demand (AD) shifts to the right (AD1), leading to the increase in output (Y to Y1) and increase in price level, which is inflation (Ko, J & Morita, H 2019) As a result of the application of fiscal policy, Japan minimized the fall in GDP with the contribution of 0.7% and the deflation ended up at -1.3%. Besides, in the long run, the implementation of fiscal policy will help Japan to gradually recover in the next few years. A series of reducing taxes and increasing government spending put Japan in a deeper budget deficit. The deficit increased nearly double in 2009. This was the main obstacle for Japan to apply fiscal policy (OECD n.d) 2.2 The implementation of contractionary fiscal policy in 2014. In 2014, the inflation increased to the highest peak of 2.8%, which was beyond the government target of 2%, besides, GDP growth just achieved 0.3%. Due to the impact of recession, to

recover, Japan implemented a series of policies such as monetary and fiscal policy from 2008 to 2013. For this reason, Japan experienced the highest inflation in 2014 as the result of stimulus policies (Doi, T 2018). In 2014, Japan’s budget situation was in deficit with -288T yen, besides, the government gross debt to GDP also increased to 235%, the public debt did not improve but increased deeper due to numerous stimulus packages and tax rates reduction ( Kim, S 2018). Therefore, in April 2014, Japan government decided to implement the contractionary fiscal policy with the consumption tax increase from 5% to 8%, the month after increasing the consumption tax, consumption demand reduced 10.6%, lower than the expected fall of 12%. Otherwise, Japan decided to reduce the government spending in 2014 to 112T yen, equivalent to -5.7% reduction annually. The decrease in government spending contributed to the weak GDP growth of 0.3% since the government spending accounted for 20.12% of gross domestic products (Iwaisako, T 2014)

Figure 6: illustration of AS AD contractionary fiscal policy

Theoretically, with the decision to decrease government expenditure and increase in consumption tax, the government aimed to ease the inflation and increase the tax revenue to achieve the budget surplus goal in 2020. With the decrease in spending, the aggregate demand will be reduced in the short run, then reduce the output and price level. Besides, the increase in taxes reduced the disposable income, then consumption might be decreased and investment level also reduced. As a result, the output would decrease along with the inflation. To illustrate, as the figure 6 indicates that when government spending decreases and taxes increase, the aggregate demand (AD) will shift left (AD1), leading to the Y shift left to Y1 (output decrease, GDP down) and the price level also decreases from P to P1 (inflation reduces) (Kim, S 2018) After implementing the contractionary fiscal policy, it was efficient in easing the inflation, reaching 2.8% by the end of 2014 despite the inflation in Q1 and Q2 reaching nearly 4%. However, Japan had to trade- off with the GDP slowing down at 0.3% in 2014. This also was the main obstacle for Japan since the government expenditure accounted for a significant portion

(20.12%) in GDP, therefore, reduction in spending led to the slowdown in GDP (Iwaisako, T 2014)

2.3 Comparison and contrast between expansionary and contractionary, in 2009 and 2014 respectively. In 2009, the fiscal policy did not bring the efficiency as expected, the GDP still fell down heavily with -5.7%. However, the fall can be explained by the heavy fall in international trade since Japan was an industrial production country. In 2014, when implementing the contractionary fiscal policy, it helped Japan to ease the inflation, but the nation had to trade off with the fall in GDP. In conclusion, the fiscal policy in 2014 seems to be more effective than 2009 since it was effective as expected. 2009 was an exceptional case since the impact from international trade was significant, therefore, the effectiveness from the fiscal policy was not obvious (Akram, T 2016)

3. Reflection Vietnam has recorded strong and sustainable growth from 2016 to 2019 with the annual growth rate above 6%. In 2020, Vietnam was negatively impacted by the pandemic and recorded a slowest growth rate with 2.9%. As the high openness level of 200% to GDP, Vietnam has been experiencing the pressure from imported inflation, which lead to the increase in production costs, causing the increase in inflation. To stabilize and control the inflation under the target of 4%, monetary policy was implemented as the main tool to accomplish the goal since 2012, the interest rate was adjusted by the State Bank of Vietnam to control the inflation. Specifically, SBV reduced the interest rate by 0.25% year-on-year so as to increase the money supply to encourage the firms to borrow more to invest to serve the long-run growth. It is necessary for Vietnam to apply the policy to control the inflation since the economy grew strongly, domestic demand rapidly increased and due to the highly openness level, Vietnam suffered highly pressure from imported inflation, hence, the tool was suitable for Vietnam to stabilize the inflation. Moreover, inflation could impact the exchange rate which affects international trade. Therefore, to help global trade grow sustainable, the inflation should be stabilized. Otherwise, to react with the effect from the pandemic. In 2020, Vietnam also applied fiscal policy to boost the recovery. Specifically, Vietnam has introduced a stimulus package of VND292 trillion and taxes deferring also implemented. The stimulus program was released in order to encourage the economy to recover quickly. Like Japan, to respond to the recession, Vietnam applied the expansionary fiscal policy to boost the aggregate demand and encourage consumption to increase. Otherwise, Vietnam is a potential nation that strongly appeals to the FDI. Recent years, Vietnam has signed important free trade agreements such as CPTPP and EVFTA, these FTAs help Vietnam to strongly increase the export with 0% tariffs to advanced economies such as Europe. Nevertheless, Vietnam still faces the risks that are caused by covid-19, for example, the risks of closing borders, supply chain

disruption and social distancing are still a significant concern. These are threats that could decelerate Vietnam growth.

References IMF 2014 ,‘2014 ARTICLE IV CONSULTATION—STAFF REPORT; AND PRESS RELEASE’, International Monetary Fund, p. 6-40 The World Bank n.d, ‘GDP growth (annual %)’, The World Bank The World Bank n.d, ‘unemployment rate %’, The World Bank The World Bank n.d, ‘inflation rate %’, The World Bank IMF n.d, ‘Country: Japan’, International Monetary Fund. Ko, J & Morita, H 2019, ‘Regime Switches in Japan's Fiscal Policy: Markov‐Switching VAR Approach’, The Manchester School, vol.87, issue.5, p. 724-749. Jones, R & Urasawa, S 2013, ‘Restoring Japan's Fiscal Sustainability’, Elsevier, p. 24-40 Akram, T 2016, ‘Japan's liquidity trap’, Levy Economics Institute, Working Papers Series, Working Paper 862. Doi, T 2018, ‘Is Abe's fiscal policy Ricardian? What does the fiscal theory of prices mean for Japan?’, Asian Economic Policy Review, vol.13, issue.1, p. 46-63. Kim, S 2018, ‘13. Lessons for Korea from Japan’s fiscal policy’, Economic Stagnation in Japan: Exploring the Causes and Remedies of Japanization Iwaisako, T 2014, ‘Japan’s Fiscal Problems in the Mirror of the United States’, Discussion Papers at Institute of Economic Research Hitotsubashi University. Tokuoka, K 2010, ‘The outlook for financing Japan's public debt’, International Monetary Fund, Enatsu, A 2013, ‘The Significance of Japan's Fiscal Investment and Loan Program during Japan's Period of Rapid Economic Growth and Possible Lessons for the Rest of Asia’, Nomura Journal of Capital Markets, vol.5, issue.2 Ueda, K 2012, ‘Japan's Deflation and the Bank of Japan's Experience with Nontraditional Monetary Policy’, Journal of Money, Credit and Banking, vol.44, p.175-190. OECD 2014 ,’current fiscal development in Japan’, OECD...