Japan’s Recession: How the Government and the BOJ Are Trying to Revive the Economy
The Bank of Japan has been persisting with its negative interest rate policy, but the disappointing GDP figure has cast doubt on the bank’s strategy of stimulating inflation through domestic demand.
Japan’s economy has entered a recession, shrinking by 0.4% in the last quarter of 2023 compared to the same period in 2022. This was lower than anticipated and was blamed on high inflation, which has been reducing the purchasing power of consumers and businesses and dampening domestic demand and consumption.
The Bank of Japan (BOJ) has been persisting with its negative interest rate policy, but the disappointing GDP figure has cast doubt on the bank’s strategy of stimulating inflation through domestic demand.
Johan Chairil
The bank thinks that higher wages would lead to a positive feedback loop, motivating consumers to spend more, but the recent growth figure indicates that high inflation is harming domestic consumption despite the possibility of higher wages.
A stimulus package
The government has announced a 17 trillion yen stimulus package to compensate for the purchasing power lost to inflation with temporary tax relief and fuel subsidies.
By the second half of 2024, easing inflation and rising wages should enable a stronger recovery to emerge. Japan’s government has been pursuing various policy initiatives to tackle the economic difficulties facing the nation. One of the main difficulties is high inflation coupled with relatively low wage growth, which is likely to hinder growth in the short term.
To counteract the purchasing power lost to inflation, the government has introduced a 17 trillion-yen stimulus package that comprises temporary tax relief and fuel subsidies.
The government is also striving to speed up wage growth, which is expected to improve in the second quarter of 2024. However, wage growth will stay low until March or April 2024, when most annual wage talks are expected to take place. The government is also attempting to diversify investments away from China and address demographic issues, such as labor shortages and an aging population.
The government has been promoting self-reliance in agriculture and expanding the Nippon Investment Savings Account to provide more incentives for households to invest in assets.
The Bank of Japan has been maintaining its negative interest rate policy, but central bank officials have suggested that rate hikes may be coming soon. The government’s control and influence over business is stronger and more widespread than in most other countries with market economies, and the government’s regular dialogue with business is conducted mainly through joint committees and groups that oversee the performance of nearly every branch and sector of the economy.
Japan's Budget
The Japanese government’s policies have been aimed at tackling economic difficulties such as high inflation, low wage growth, and demographic issues. However, the effectiveness of these policies has been varied. The government’s 2021 $944 billion budget and the 2023 $17 trillion stimulus package have helped to prevent declines in employment and business failures, but they have not been enough to significantly increase economic growth or wage rises.
The government’s efforts to diversify investments away from China and address demographic issues are long-term challenges that require structural changes to the Japanese economy and immigration system. The Bank of Japan’s monetary policy has been supportive, but inflation remains low, and wage inflation has slowed since late 2019. The government’s emphasis on rural public works projects and health care has diminished the economic impact of government spending.
In summary, the government’s policies have been successful in preventing economic downturns and supporting the economy during the pandemic. However, they have not been effective in addressing the underlying causes of Japan’s economic difficulties, such as low wage growth and demographic issues.