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In Japan, Woe is the Word
Subject Recession
Topic International Finance Economic Policy
Key Words Recession, Interest Rates, Economic Growth
News Story

Recession, economic insecurity and consumer pessimism characterize Japan's economy. Japan is entering its fourth recession in a decade, unemployment at 5.4 percent is at a postwar high, and the government's budget deficit is 130 percent of gross domestic product - the highest of the developed economies. According to the International Monetary Fund, Japan's economy will shrink 1 percent this year and 1.3 percent next year. These data undermine Japanese consumer confidence in their economy.

When U.S. auto dealers announced in October a zero interest rate-financing plan on the purchase of new cars, auto sales jumped 26 percent, in spite of a recession. In contrast, in Japan, zero interest rates have been the norm for some time, yet auto sales fell 20 percent in October to a 25 year low. Japanese consumer are not spending or borrowing even though Japanese banks have plenty of excess reserves to lend.

One reason for the pessimism is the fear of job loss. Even though 95 percent of these Japanese who want to work are employed, the level of unemployment has been rising steadily and is currently at a post-war high. Japanese firms are restructuring and laying off workers, an event once unfathomable. According to one survey, 72 percent of the adults surveyed feared a job loss. In addition, 67 percent believed that the economy would get worse. As a result, according to another survey, 40 percent said they were cutting personal spending. Fear of job loss is especially high among older workers. Age limits appear in job ads, despite a law is banning this form of discrimination.

Economic insecurity is especially prevalent among Japanese workers who are close to retirement. Because of the budget deficit there is talk that government pensions will be cut. With more people above 65 than under 15 in Japan, loss of pension benefits provides incentives to save. The Japanese savings rate is about 11 percent - about 5 times the rate in the U.S.

Japanese pessimism is cited as a major reason for failed government policies. In spite of near zero interest rates and high levels of government spending, consumer spending has not picked up and economic growth has suffered.

(Updated January 15, 2002)

Questions
1. Why is consumer confidence such an important factor in determining economic growth?
2. Why would individuals put their savings in banks that pay near zero interest rates? What has happened to Japan's stock market in recent years?
3. Suppose that the yen fell significantly vis-à-vis the dollar. What would happen to Japanese exports? Imports? Would this policy stimulate the economy?
Source James Brooke, "Recession Saps Consumer Confidence in Japan," The New York Times, December 6, 2001.

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