Japan: country

report

Valentina Yepes Ortiz y Mariana Chejne Lopera

Introduction:
Living in an interconnected world, force us to be daily informed and aware of the changes
that happens in different countries, because those changes can affect the decision making of
individuals and firms more than ever before. Therefore, the objective of this report is to
analyze the general economic situation of Japan during the last decade in order to identify
the pros and cons of developing a bilateral trade relationship between the country and
Colombia. In this particular case, the report tries to evaluate the possibility of a company
like Maaji to open a new market the Asian country.
Japan, often called the "Land of the Rising Sun", is a country located in the Eastern Asia
region, it is an island chain between the North Pacific Ocean and the Sea of Japan, in the
east of the Korean Peninsula, whose capital is Tokyo. The total Japanese surface is 377,915
square kilometers, including land and maritime areas and because of its conditions as an
island it doesn't have any land boundaries. (The Central Intelligence Agency, 2018).
Its population estimate for 2017 is 126,641,000 people, distributed mainly on the cost and
one-third of the population resides in and around Tokyo. Moreover, the main ethnic groups
in the country are the Japanese, that represent the majority of the population, with a share of
98.5% of the total and the minorities are Koreans (0.5%), Chinese (0.4%) and other ethnic
groups (0.6%). Also the population share among them the recognized national language that
is Japanese. In addition, the major religions are Shintoism and Buddhism, both of them
with a large number of devotees, followed by Christianity and other religions, but with less
share of the population. (The Central Intelligence Agency, 2018). Additionally, as literature
confirm, Japan´s population, has the highest proportion of older adults in the world, being
this a major issue for public policies (health and pensions).

Japan population in the last decade

128,500,000
128,000,000
127,500,000
Population

127,000,000
126,500,000
126,000,000
125,500,000
07 08 09 10 11 12 13 14 15 16 17
20 20 20 20 20 20 20 20 20 20 20

Years

Graph 1: Japan's population in the last decade. Source: own elaboration with data from the World Bank

Besides, since 1947 Japan established a democracy in form of a constitutional monarchy,

maintaining the imperial family as the honorary figurehead of the country. The current
emperor, Akihito is reigning since 1989 and prime minister, who is the face of Japan’s
acting government Shinzō Abe. The legislative branch is composed by the Bicameral Diet,
which consists of the House of Councilors or Sangi-in and the House of Representatives or
Shugi-in, the Cabinet and the judiciary sections of the government.
After this general overview of Japan, the report will explain the country’s macroeconomic
situation, the balance of payments, the exchange rate and the international trade relationship
with Colombia in the past ten years. And to conclude the report, it is going to be explained
if there are possibilities, according to the economic situation, for the company to incursion
in the Japanese’s local market.

Macroeconomic situation:

Japan is nowadays a privilege and one of the biggest economy in the world, achieving
remarkable growth after the devastation of Second World War, and as Richard Katz (2003)
affirms, “A half-century ago, Japan picked itself up from the ashes of war and, within a few
years, stunned the world with its economic achievement”.

Japan's GDP (constant LCU)

540,000
530,000
Billions of US dollars

520,000
510,000
500,000
490,000
480,000
470,000
460,000
450,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Years

Graph 2: Japan's GDP. Source: own elaboration with data from the World
Bank

Therefore, in the past decade, Japan has had a stable GDP growth rate (1,5% in average),
except for the 2008 financial crisis and the 2011 natural disaster, caused by an earthquake
and a tsunami, as seen in Graph 2 and 3.
Furthermore, the financial crisis from 2008-09, really affected the Japanese economy,
experimenting a negative GDP growth rate of 5,4% (Graph 3). Literature shows that “the
crisis had a bigger impact over the Japan’s economy than the effects on other advanced
countries. The Japan’s economic contraction surpassed the contraction experienced by the
United States (-2.4%), the Euro Area (-4.1%) and the United Kingdom (-4.9%), where the
financial crisis for the most part originated.” The last was caused principally, because even
though US subprime loans did not severely affect Japanese banks, the country has a high
 Graph 3: GDP growth rate(%). Source: own elaboration with data from the
World Bank

Dependence of exports (mostly automobile and electric), and its national industry relies on
imported commodities, that at the time, had a sharp rise in prices.[ CITATION Mas09 \l
9226 ]
Also, the 2011 earthquake and tsunami, followed by the damages in the nuclear plants, had
a negative impact in Japan´s economy, first because of the loss of considerable physical and
human capital and second because of the structural damage in the country´s infrastructure
and the period of uncertainty and danger of the radioactive effects.[ CITATION Coo11 \l
9226 ] This was followed, by an economic growth, due to the reconstruction of the country.
Taking also into account Asian Pacific region, these economies have experimented rapid
growth in the last decades (faster than other regions in the world), because they overcame
their weakness in natural resources and have took advantage of their human capital
[ CITATION Mor15 \l 9226 ]. Studying the GDP growth rate from China, India and South
Korea, and comparing those rates with the Japan’s GDP growth, it can be notice that
Japan’s growth rate has been the lowest from the four countries in the last ten years, but it is
worth mentioning that the periods of crisis have hit the region in general, each country in a
different time (presence of some lags) and proportions (deeper or smoother), but all of them
felt the global financial crisis.
Japanese unemployment rate has been one of the lowest among OECD countries,
nevertheless, as shown in Graph 4, the 2008 crisis affected the unemployment rate, shifting
the tendency of 3-4% to 5% in the 2009-2010 period.
 Graph 4: Unemployment rate. Source: own elaboration with data from the IMF

As K. Hamada and Y. Kurosaka (1986) explain the labor market characteristics in Japan,
underlying some facts as: The Japanese are among the longest living people, working hours
are long compared to international standards and labor high quality, promote economic
growth.
Regarding to the government spending, Japan’s has experimented a growth in the past
years, spending 35% of GDP in 2006 to around 40% in 2015. Nevertheless, as seen in
Graph 5, government expenditure has been higher in periods of economic contraction, like
the 2008 crisis and the 2011 earthquake, due to the necessity of government intervention to
boost the economy and the money spent in the reconstruction of infrastructure.

Graph 5: Government spending as a percentage of GDP. Source: own

elaboration with data from the OECD
 Graph 6: Government spending by sector. Source: own elaboration with data from the OECD
Additionally, Graph 6 illustrates how this government spending is distributed, standing out,
the low percentage that is spend in defense (9% in average) and the high percentage
assigned to health. Authors Gould (1983) and Nozaki et al (2016) explains this by arguing
that the low defense budget is due to constitutional reasons (even if this is atypically low
compared to similar countries) and that the health spending is rapidly increasing over the
past years because government provides the population with universal care and because of
the ageing phenomenon.

Graph 7: Inflation. Source: own elaboration with data from the World Bank

Also, inflation plays a crucial role in the performance of an economy, and “Japan has
suffered from long-lasting but mild deflation since the latter half of the 1990s” [ CITATION
Ken12 \l 9226 ]. According to the authors, there are three hypotheses that might explain this
deflation phenomenon, first that The Bank of Japan (BOJ), has been lowering the inflation
target and this brought down consumer’s expectations, second, the central bank has a
deficient communication strategy and third the public perceived that Japan’s prices were in
general too high in comparison with those of other countries. To fight this, the BOJ, has
done numerous changes in the explicit target of monetary policy, like the implementation of
quantitative easing at the 2000s (non-conventional monetary policy to increase the money
supply) and the inflation target policy with a 2% inflation goal (since 2013). As illustrated
in Graph 6, the 2% inflation target has only been achieved in 2014, is the lowest in the
region and is the only one that has reached negative values.

Graph 8: Money supply. Source: own elaboration with data from the OECD

Graph 8, shows the rising tendency in money supply and the quantity of money circulating
in the economy (M1). The previous is consistent with the policy of the BOJ to increase
available money in the economy, in order to achieve the inflation target and to anchor
consumer’s expectations to this goal.
The Doing Business factor measures all regulations a country imposes to companies before
they start to produce. The differences in this characteristic between countries lead more
people to be interested in being part from this environment and to base their enterprises in
the country which offer the best conditions.
The first topic is the cost to start a business as a percentage of the income per capita. The
World Bank explain in the economy profile of Japan, “This topic measures the paid-in
minimum capital requirement, number of procedures, time and cost for a small- to medium-
sized limited liability company to start up and formally operate in economy’s largest
business city” [ CITATION Wor18 \l 9226 ] and as seen in Graph 9, the cost to start a
business rate has been stable during the last decade in Japan, this implies that people find in
Japan a stable environment in which they can invest their patrimony.
 Graph 9: Doing business. Source: own elaboration with data from the OECD

Moreover, the solvency problem for a firm is an important fact when starting, and the
indebtedness in inevitably for most of the newborn firms; the possibilities a country
provides to encourage the loan of money incite those new entrepreneurs to start there their
business. In this perspective, this indicator, as the starting a business cost, has been stable
until 2014 where there was an increasing from 3,5 to 4,2 approximately which rank Japan
in 77 position, still far away from other developed countries like United Stated (Rank 2),
and this mean that the strength of legal rights and the depth of credit information index
needs to improve.
Finally, another fact that determines the location of a business is the tax rate as a percentage
of profits. This covers all the taxes and mandatory contributions that a company must pay
in a given year [ CITATION Wor18 \l 9226 ]. On average, a firm located on Japan has had
to pay in the last decade the 49,95% of its profits as taxes. Although it is a large part of the
profits, Japan is in the middle of the World Bank rank. And as seen in the country, all those
taxes are well distributed on different sectors of the country giving people better
possibilities to create firms and to increase their welfare.
References
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the United States. Retrieved from https://fas.org/sgp/crs/row/R41702.pdf

International Monetary Fund. Retrieved from

http://www.imf.org/external/datamapper/LUR@WEO/JPN

Katz, R. (2003). Japan's Phoenix Economy. Foreign Affairs, 114-129.

Kenji Nishizaki, T. S. (2012). Chronic deflation in Japan. BIS Papers.

Kurosaka, K. H. (1986). Trends in Unemployment, Wages and Productivity: The Case of Japan.
Economica.

Mizobata, S. (2011). The Japanese economic system under the global crisis: change and continuity.
Society and Economy, 271-294.

Morley, J. (2015). Driven by Growth: Political Change in the Asia-Pacific Region. Retrieved from
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Neely, C. (2016). Japan Industry News. Retrieved from

https://www.japanindustrynews.com/2016/06/japanese-political-system/

OECD. Retrieved from https://data.oecd.org/

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The Central Intelligence Agency. (2018). The World Factbook. Retrieved from
https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html

The World Bank. Retrieved from https://data.worldbank.org/

World Bank Group. (2018). Doing business 2018: Reforming to create jobs. Economy profile. Japan.
Retrieved from
http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Profiles/Countr
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Yetman, M. H. (2017). The evolution of inflation expectations in Japan. BIS Working Papers.