Question

I have a 2 part practice question on Japan and wondering how I would answer it and what the actual answer is

• What type of policy interventions are likely given the country context - Monetary? / Fiscal?
• How exposed is the economy to internal shocks (eg. fluctuations in demand for money / regional shocks )

Answer 1

Solution Question 1 :

Monetary policy pertains to the regulation, availability and cost of credit, while fiscal policy deals with government expenditure, taxes and debts.

The ministry of Finance played an important role in Japan’s economic growth. High proportion of governments spending going to capital accumulation and minimum government spending.

Fiscal policy much play an important role, it can impact GPD faster than an expansionary monetary policy. Fiscal policy has lowered prices. An expansionary monetary policy can increase GDP more persistently than an expansionary fiscal policy. Expansionary monetary policy has raised prices.

Japanese government wants to strongly boost GDP alone. It should use fiscal policy alongside monetary policy. Because fiscal policy can immediately raise GDP. If the Japanese government seeks moderate increase in both GDP and prices, it is more effective to use monetary policy alone without increasing fiscal expenditure.

Solution Question 2 :

Economic shocks are random and unpredictable. Below are the biggest problems that faces.

• Global Economic downturn adds to the domestic structural challenges that Japanese banks facing such as negative policy rate, intense competition and changing client needs.
• An ageing population, so government will have to spend more on healthcare sector.
• Shrinking work force and tax base causes stagnation.
• Current global pandemic – Covid 19 causing unprecedented shock in world economy.