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JAPANESE ECONOMY SEEING TOUGH TIMES


May 19, 2008 Source:  www.AsiaEcon.org Many factors are contributing to Japan's less than perfect economic state right now. Japan is experiencing a fast increase in prices which has not been seen in a decade.


19 May 2008 

Source:  www.AsiaEcon.org

Many factors are contributing to Japan’s less than perfect economic state right now. Japan is experiencing a fast increase in prices which has not been seen in a decade. Energy and food prices rose by 1.2 percent from a year earlier since March 2007. Due to the devaluation of the USD against the JPY, export volumes to the U.S. are falling, and exports to Europe and the rest of Asia are slowing down.

Electricity rates have never been as large as they are today; gas prices are not falling either. Currently, they are projected to reach a record high in July 2008. All suppliers of electricity (with the exception of Hokuriku Electric Power Co.) are increasing prices for the fourth consecutive quarter. These higher utility bills are a result of rising fuel and material prices. Japan’s major concerns at the present moment are ongoing financial market turbulences and increasing energy costs.

Due to the outcome of high energy and material prices, and the fall in housing investment prices, the economy of Japan is growing slowly for the moment being, but it is likely to continue expanding. The Bank of Japan (BOJ) changed its October growth projection from 2.1 to 1.5 percent starting in April 2008.

Wholesale inflation rose 3.7 percent in the last year, which was much more than expected and formed worries that the higher prices will hurt economic growth by being very hard on businesses. Rising prices hurt corporate profits. The rises in prices also raised concern that the Japanese government bond yields are being sent to a seven-month high.

The BOJ is now facing the problem of dealing with inflation on important commodities and food, growth and an American-led downturn at the same time. The new governor of the BOJ, Prof. Masaaki Shirakawa, relinquished the BOJ former plan of engaging in a tighter monetary policy with higher lending rates. Instead, the BOJ now adopted a neutral policy with their key rate; the interest rate is at .5 percent and it will remain this way for at least the next year (this lending rate is the lowest among developed countries).

 

The BOJ Policy Board decided to maintain its interest rate at .5 percent just after the U.S. Federal Reserve cut its standard interest rate, since it would be problematic to tighten lending when the Federal Reserve is infusing funds into the banking system. The bank lending’s average daily balance grew 1.3 percent in a year since April 2007 to JPY 393.28 trillion. This lending is supporting companies with their operating capital since they are now under pressure from increased petroleum (oil) and raw material prices. Japanese interested in purchasing homes are also being supported given that lending remains firm.

Japanese interested in purchasing homes are also being supported given that lending remains firm.

The recent earthquake in China is taking quite a toll on Japan’s economy as well. The earthquake is said to have slowed production in China, which greatly affects Japan’s economy because China is a major trading partner for Japan.

The slowing economy is also taking a toll on Nissan, the Japanese carmaker. Earnings are expected to fall by 30 percent by March 2009. Some key factors in the slowdown include higher steel and energy costs (another effect of the rising inflation) and the stronger yen, making Japanese exports more expensive. The president of Nissan is nervous about the year to come and how the company will perform. Nissan has created a five-year plan that creates revenue growth, but net income is predicted to fall.

Source:  www.AsiaEcon.org 

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Source: www.asiaecon.org |


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