The economy of Japan is the second largest developed economy in the world which has the third highest amount of nominal GDP. It is also ranked fourth with respect to purchasing power parity. In terms of per capita GDP also, the country records one of the highest numbers in the world. The economy of Japan is mostly noted for its manufacturing industry and it is ranked third in terms of automobile manufacturing. The electronics goods industry of Japan is the largest in the world. The primary manufactured commodities of Japan are high-tech goods which include robotics, optical instruments and hybrid vehicles. The trade balance of the economy is always in surplus because it is known to be the biggest creditor in the world. The net foreign investment in the country is generally always positive which implies that the inflow of foreign investment is more than the outflow. This indicates that foreign investors receiving a considerably high return perceive a high degree of growth opportunity in the Japanese economy and hence investment flows in abundance into the country.  However, the extremely high public debt to GDP ratio of the country along with the declining population in the country poses a very severe trouble for the economy. Japan is a highly industrialized economy with a very low percentage of GDP accounted for by the agricultural sector. The service sector in Japan also accounts for a considerable proportion of the GDP. Though corporate tax rates are high, personal income taxes and consumption taxes along with other important tax rates are very low compared to the other develop
ed economies. Thus the administrative environment of Japan facilitates business to a great extent.

Production Output Performnace Analysis

The Gross Domestic Product (GDP) of a country refers to the value of all the final goods and services produced within the economy in a given accounting year. The GDP is an indicator of the level of output and income in an economy. It measures the economic performance of the country in absolute terms (Dornbusch, Fischer and Startz, 2013).

The real GDP is the value of final production adjusted for the changes in the price level in the economy. The real GDP of Japan shows a consistently growing trend over the given years. Hence, in absolute terms, the economic performance Japan has been considerably high over the given period (Mankiw, 2012).

In Japan, the service sector, the manufacturing sector, the retail sector and the real estate sector account for a very large proportion of the GDP (Flath, 2005). The service sector accounts for almost 71% of the total GDP, the industrial sector accounts for around 28% whereas agriculture only accounts for 1% of the GDP. Thus Japan is essentially a service and industry based economy (Caves, Frankel and Jones, 2007).

The real GDP growth rate is the annual growth rate of the real GDP accounting for the changing prices. It is a measure of the economic growth rate of a country. It indicates how rapidly an economy is growing over the years. The higher the real GDP growth rate, the better will be the economic performance of a country (Mankiw, 2012).

The growth rate of the real GDP of Japan has fluctuated considerably ranging from extremely low negative values to extremely high positive values. The negative values were recorded during the global financial crisis that hit the world economy during 2007 – 2008 (Tabuchi, 2009). Previously also the growth rate had declined to negative levels but during the period of the global financial crisis Japan experienced the lowest growth rate or the highest negative growth rate. In 2010 – 2011, the growth rate steeply increased to the highest level over the period concerned (Blanchard and Johnson, 2012).

The per capita real GDP is defined as the amount of income or output allocated to every person in the economy adjusted for inflation. It is measured by dividing the real GDP by the total population of the country. The per capita real GDP is the indicator of the degree of affordability and the standard of living in a country since it is a measure of the income that should accrue to each individual in the economy.

The real GDP per capita in Japan has consistently grown over the given period. This shows that the standard of living in Japan has improved over the years. However, this might not be attributed to a growing real GDP. Thus more viable reason for an improving standard of living is the declining population in Japan (Dornbusch, Fischer and Startz, 2013).

The economic performance of Japan can be primarily attributed to the heavy industrialization in the economy towards the end of the 19^th century. The government had a major role to play in the industrialization process. In the early 1980s, the government had given up the ownership of a few significant enterprises to the private sector. The banking sector of the economy is highly developed which helps generate savings and investment in the economy. The aggressive trade policies adopted by the government expand the exports sector and hence influence the economic growth. The severe formal regulations of the government control business activities and hence influence the demand and supply side of the economy.

Labour Market Analysis

The unemployment trend in Japan shows an upward rising movement over the period concerned. However, the unemployment trend has recorded very high fluctuations which indicate that the labour market in Japan is not very well organized. From the late 1990s to the early 2000s the unemployment rate in Japan has been quite high. It declined in the mid-2000. However, during the years 2007 – 2008 when the global financial crisis occurred, the level of output declined rapidly leading to a fall in the level of employment. Hence the unemployment rate increased considerably. In the recent years, the unemployment rate in Japan has fallen sharply. In February 2017, the unemployment rate recorded was the lowest since 1993. It is anticipated that Japan will soon be at the full employment level.

Unemployment refers to the state of an individual who in spite of actively looking for work cannot find any. The unemployment rate measures the percentage of the total labour force that is unemployed in an economy (Dornbusch, Fischer and Startz, 2013). The different types of unemployment in an economy are:

1) Frictional Unemployment: When workers change jobs, there is a time gap between leaving the old job and starting off the new job. Again, workers actively looking for jobs may lose some time before they find the appropriate job. The same issue can arise on the part of the employers when they are unable to find the appropriate candidate for a certain position. The time lag that is generated gives way to frictional unemployment. This is temporary phenomena (Blanchard and Johnson, 2012).

2) Structural Unemployment: Due to various reasons, there might be structural changes in an economy over a given period of time. The changing economic conditions may necessitate structural changes in the job sector. However, the labour force of the economy may not be adequately equipped with the skills and expertise necessary to fulfill the requirements of the changing job structures. This is what leads to structural unemployment in the economy (Dornbusch, Fischer and Startz, 2013).

3) Cyclical Unemployment: Trade cycle is a recurring phenomenon in developed nations. A recessionary trade cycle causes the aggregate demand in an economy to fall. This leads to a decline in the production of output and hence in the demand for labour, that is, effective demand is insufficient in the economy. This leads to cyclical unemployment (Dornbusch, Fischer and Startz, 2013).

The foremost type of unemployment found in Japan is structural unemployment. Over the years Japan has experienced shifts in the production overseas. Moreover, it has been increasingly importing from the neighboring countries (Krugman, Obstfeld and Melitz, 2012). The production process has become more capital intensive over the years. This has led to a fall in the employment in the manufacturing sector. Again, there is deficiency of labour in the nursing industry. Thus the type of employment required does not match the type available (Blanchard and Johnson, 2012). This gives rise to structural unemployment in the economy. However, in recent times, the level of unemployment in the Japanese economy has drastically fallen. Japan is predicted to be on the way to full employment levels and the only kind of unemployment that will henceforth exist is temporary frictional unemployment.

In order to address the issue of unemployment in Japan, the government introduced the scheme of unemployment insurance that provides monetary benefits to the unemployed labour force in the economy. Various other fiscal policies have been adopted by the government to stimulate the aggregate demand in the economy and hence indirectly boost the labour demand (Krugman, Obstfeld and Melitz, 2012).

Price Level Analysis

In the year 1980, the inflation rate in Japan was very high. Thereafter it began declining and reached almost 0 towards the late 1980s. Since then the inflation rate has considerably fluctuated but mostly in the negative zone, that is, Japan has been experiencing large scale deflationary periods in the recent years. During 2009 – 2010, the rate of inflation was the lowest and recorded the minimum negative level. The rate has fluctuated around 0 since then. However in 2014 the inflation rate rose again from 0 to almost 3%.

Inflation is referred to as the sustained increase in the price level of an economy over a given period of time. The annual rate inflation is the increase in the price level from one year to the other measured as a percentage of the previous year’s price level. Inflation reduces the purchasing power of individuals given other factors (Samuelson and Nordhaus, 2009). The main causes of inflation are:

1) Demand-pull inflation: When aggregate demand increases due to increased expenditures in the private and public sectors, the demand in the economy goes up but the supply remains constant, at least in the short run. This generates a gap between the aggregate demand and supply in the economy. Since the aggregate supply cannot adjust immediately to the rising demand, the price level goes up to eliminate excess demand. This causes demand-pull inflation (Dornbusch, Fischer and Startz, 2013).

2) Cost-push inflation: The aggregate supply in an economy may decline due to increased input prices or even natural disasters. When the aggregate supply falls and the aggregate demand remains the same, prices rise in order to eliminate the gap between demand and supply. This rise in price originating in the supply side of an economy is called cost-push inflation (Krugman and Wells, 2012).

The inflation rate in Japan has been considerably low over the years with occasional negative values. Japan has experienced malign deflation as a consequence of its declining trend growth rate and the flexibility of the wage structure. There has been a decline in the work force due to a declining population. Hence there is a lack of sufficient aggregate demand that ultimately leads to the low level of inflation.

Over the years, the government has adopted structural reforms, monetary easing and fiscal expansion measures to address the problem of deflation in Japan. The main aim of these policies is to augment the level of aggregate demand and push up inflation to 2% level. They have increased the level of competition to improve production efficiency, reformed labour markets and widened their trade partnerships to generate sufficient aggregate demand required to push up the price level in the economy (Nelson, 2007).

Conclusion

The performance of the economy of Japan has been considerably good over the last two decades in terms of output, income and economic growth. It has performed remarkably well in terms of the nominal output that has driven its rank to be the third largest economy in terms of nominal output. The growth rate of the country is moderately good. Since it has reached a developed stage, the growth rate has stagnated to some extent. But the economic performance of the country is still noteworthy. The consistency in the growth process has been sustained over the years. The unemployment trends in the economy have transformed over the period. The level of unemployment has not been very high for Japan. In fact, the economy has been anticipated to be towards the full employment framework in the recent future. The inflation rate is remarkably low indicating a lack of aggregate demand in the economy (Blanchard and Johnson, 2012). The government of Japan plays a considerable role in determining the overall economic performance of the country. There is no direct intervention on the part of the government in the growth activities. However, it ensures the sustained growth by monitoring the economic activities. Moreover, the government adopts various fiscal and monetary policies to address the problems of unemployment and inflation. The performance of the economy of Japan has hence been considerably good over the years.

References

Blanchard, O. and Johnson, D. (2012). Macroeconomics. 6^th ed. New York: Pearson Education.

Dornsbusch, R. Fisher, S. and Startz, R. (2013). Macroeconomics. 12^th ed. New York: McGraw Hill Education.

Krugman, P. and Wells, R. (2012). Macroeconomics. 3^rd ed. New York: Worth Publishers.

Mankiw, N. (2012). Macroeconomics. 8^th ed. New York: Worth Publishers.

Krugman, P., Obstfeld, M. and Melitz, M. (2012). International Economics: Theory and Policy. 9^th edn. New York: Pearson Education.

Caves, R., Frankel, J. and Jones, R. (2007). World Trade and Payments: An Introduction. 10^th edn. New York: Pearson Education.

Samuelson, P. and Nordhaus, W. (2009). Macroeconomics. 19^th edn. New York: McGraw Hill Education.

Flath, D. (2005). The Japanese Economy. 2^nd edn. UK: Oxford University Press.

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Tabuchi, H. (2009). Japan’s Economy Plunges at Fastest Pace Since ’74. New York Times [online] p.B1. Available at: https://www.nytimes.com/2009/02/16/business/worldbusiness/16yen.html [Accessed 15 April 2017].