2024 YIJC H1 Prelim CSQ2 Answers

Question 2: Japan’s economic challenges and the road ahead Table 2: Economic indicators for Japan 2018 2019 2020 2021 2022 Real GDP Growth (annual %) 0.6 -0.4 -4.1 2.6 1.0 Consumer Prices (annual %) 1.0 0.5 0.0 -0.2 2.5 Total Unemployment Rate (% of total labour force) 2.5 2.4 2.8 2.6 2.6 Final Private Consumption Expenditure (current US$ in Trillions) 3.75 3.81 3.79 3.77 3.28 Source: data.worldbank.org, 18 June 2024 Table 3: Economic indicators for USA 2018 2019 2020 2021 2022 Real GDP Growth (annual %) 3.0 2.5 -2.2 5.8 1.9 Consumer Prices (annual %) 2.4 1.8 1.2 4.7 8 Total Unemployment Rate (% of total labour force) 3.9 3.7 8.1 5.3 3.6 Final Private Consumption Expenditure (current US$ in Trillions) 16.8 17.4 17.4 19.4 21.1 Source: data.worldbank.org, 18 June 2024 Extract 4: Performance of the Japanese economy in 2022 Japan's moderate growth, lower inflation, and structural challenges positioned it uniquely among the G7. While the United States experienced higher growth rates, driven by strong consumer demand and substantial fiscal stimulus, Japan’s growth was modest. In 2022, Japan's economic outlook was influenced by a combination of factors such as a gradual recovery from the COVID -19 pandemic and persistent structural challenges. Tokyo lifted restrictions on economic activity more gradually. This delay ed the post - pandemic increase in demand that many other countries have seen . Domestic demand in Japan is weak and this is partly a result of low wages.

Source: weforum.org 6 October 2022 Extract 5: Why Japan Stands Virtually Alone in Keeping Interest Rates Ultralow As the Federal Reserve has repeatedly pushed up American interest rates to tame rampant inflation, virtually every major central bank in the world has scrambled to keep up the pace. In the United States — where the economic recovery has been rapid and wages are rising apace — the Fed is seeking to squash inflation by throttling demand. However, the Bank of Japan has remained steadfastly committed to its ultralow interest rates, arguing that making money more expensive now would only suppress already weak demand and set back a fragile economic recovery from the pandemic. The Bank of Japan’s governor, Haruhiko Kuroda, made clear in comments to Parliament that the bank would not change course anytime soon stating that “under the current economic conditions, it’s appropriate to continue monetary easing. Weak consumer demand has made officials at Japan’s central bank wary of raising interest rates. A rate increase could also make it more difficult for Japan to service its own gargantuan debt. The debt concerns have become even more salient as the government has provided enormous fiscal support to businesses and households to counteract the economic damage from recent world events. “Fiscal policy and monetary policy are joined at the hip, and that’s what’s making it so difficult for the Bank of Japan to make a move,” said Saori Katada, an expert on Japanese financial policy at the University of Southern California. Impact on Yen The diverging economic circumstances in the United States and Japan have led to drastically different monetary policies, a gap that has helped drive down the yen as investors seek better returns elsewhere. The yen is in free fall. Consequently, while inflation pressures in the United States have been broadly distributed, in Japan they have primarily hit essentials like food and energy, for which demand is satisfied largely through imports. The weak yen has presented a difficult messaging problem for the Japanese government. The currency’s depreciation has contributed to tidy profits for export -heavy companies like Toyota, whose products have become cheaper for consumers overseas. It is also expected that the cheap yen would draw international tourists, who started to return after a nearly three-year absence caused by Japan’s tough pandemic border restrictions. But the currency’s weakness has been a drag on the finances of households and smaller businesses and could have a damaging effect on public sentiment, said Gene Park, a professor of political science at Loyola Marymount University in Los Angeles who studies Japan’s monetary policy.

It’s unclear whether raising interest rates would even arrest the yen’s plunge. Rate increases by other central banks have done little to protect their own currencies against the muscular dollar. Source: The New York Times, 21 October 2022 [Turn over

Table 4: Percentage of Japan General Government Gross Debt to GDP Source: tradingeconomics.com/japan/government-debt-to-gdp, accessed 30 July 2024 Extract 6: Fiscal Prudence and Structural Reforms Needed to Secure Sustained Post-Pandemic Growth The Japanese economy is confronted with several structural challenges includ ing weakening fiscal discipline, side effects from prolonged monetary easing, and demographic drag from population aging and low fertility rates, which contributed to labor shortages, lagging productivity and competition as well as increased social security spending. Additionally, behind Japan’s sluggish growth is stagnating wages that have left households reluctant to spend. At the same time, businesses have been invested heavily in faster growing economies overseas instead of in the aging and shrinking home market. In addition, Japan's debt swelled, reflecting its heavy reliance on borrowing to meet spending needs to fight the COVID -19 pandemic. There is an urgent need for Japan to restore its fiscal health, the worst among developed countries, to avoid high debt servicing costs and low confidence in the economy. Priority should be given to rebuild fiscal buffers by containing social security expenditure while raising tax revenues in the post -pandemic period. Credible fiscal consolidations to ensure long -term fiscal sustainability can help lower funding costs, impro ve fiscal headroom and financial stability. Nonetheless, fiscal policy should remain supportive of the economy in the short term, with targeted measures to hard -hit sectors, backed by a credible medium-term fiscal consolidation plan. Rather than provide universal supports to all households, it is more critical to roll out well-targeted spending measures for vulnerable households and hard-hit businesses in the services sector to enhance the efficacy of the stimulus packages, given the tight fiscal situation. Additionally, comprehensive structural reforms should be quickened to address Japan’s long-term challenges. Japan must also improve the human capital of their young populations, especially as the rest of the country is aging rapidly. Digitali sation should also be accelerated while immigration is one option for solving Japan’s labor shortage problem. The country, however, has been relatively unaccepting of foreign labor, except for temporary stays. On the other hand, artificial intelligence also gives hope for boosting productivity. Robotics, another option, are gradually being deployed but not to the extent they can fully make up for the lack of workers. Source: apnews.com, 16 February 2024 and: amro-asia.org, 9 March 2022 2018 2019 2020 2021 2022 232.3 236.3 259.4 262.5 263.9

(a) (i) Using two indicators from Tables 2 and 3, what can you conclude about living standards between Japan and US in 2022? Comment on the effectiveness of these indicators as a measure of living standards. Suggested answers: [2m] US real GDP growth in 2022 is higher than Japan’s real GDP growth, suggesting that the increase in real GDP is greater in US than Japan. This implies that the increase in the amount of goods and services available for consumption is greater in US than in J apan. Hence US’s material SOL may have improved greater than Japan. [To note: student cannot compare the level of SOL. Only the change in SOL is accepted.] [2m] Total unemployme