South-Western College Publishing - Economics  
The Sun Could Be Rising
Subject Recession
Topic International Finance
Key Words Recession, Gross Domestic Product, Economic Growth
News Story

Japan has been in a recession for the past two years. Economists have described its economy's many problems and reported that proposed remedies have had little success in turning things around -until this quarter. Japan announced that its gross domestic product (GDP) increased for the first quarter of 1999 by 1.9 percent from the fourth quarter of 1998: a 7.9 percent annual rate. Japanese officials were quick to point out that one quarter's growth in GDP, while certainly welcome, does not mean that Japan's economic problems or its recession have ended.

Economists were not optimistic that Japan's GDP would increase this year. Unemployment is at a record high of 4.8 percent. Layoffs, early retirements and decreases in employees' annual bonuses would appear to constrain consumer spending and dampen the economy. However, the government's latest stimulus package, an $800 billion spending program together with tax cuts, credit guarantees, and shopping vouchers, has apparently had some success in stimulating the economy. Continuing its pump-priming efforts, the government will unveil a new spending program designed to halt the increase in unemployment by creating 700,000 new jobs. Government estimates are for GDP to increase by one-half of one percent for 1999.

Whether Japan's economy is on its way to an economic recovery is not certain. Some argue that if the government were to curtail its spending, economic growth would cease and the economy would continue its decline. Critics of these spending programs, observing that public-sector debt has ballooned, argue that these programs are an expensive way to avoid the structural changes that are needed to make Japan globally competitive. In fact, one danger of this economic turnaround is that business firms will become complacent and avoid needed reform.

(Updated July 1, 1999)

1. Illustrate, using aggregate demand/aggregate supply diagrams, the impact of an increase in government spending on real GDP and the aggregate price level.
2. What is the relationship between an increase in government spending and an increase in GDP?
3. The government hopes that increased government spending will stimulate consumer spending and business investment. How do induced changes in consumer spending and business investment affect GDP?
4. The release of Japan's GDP figures caused the yen to increase relative to the dollar. This increase was not looked upon favorably by Japan. Why? How would an increase in the yen hurt Japan's recovery efforts?
Source Stephanie Strom, "Japan Grows 1.9%, to Economists' Disbelief," The New York Times, June 11, 1999

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