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Japan’s Economic Stagnation Case Study

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Updated: Jul 4th, 2019

Reasons for Japan’s economic stagnation

Japan’s economy, which was once an envy of various economic players in the world due to its robust growth during the 1980s, plummeted into constant stagnation that proved difficult for the country to revamp. Several economic scholars have cited various reasons for the stagnation.

However, the solutions to the economic situation proved elusive. While deflationary pressures have been cited as the major cause of the Japan’s economic stagnation, other factors such as surplus in savings, policy mismanagement, structural impediments, the appreciation of the country currency (Yen), the global capital flows and political factors have also contributed to the downturn.

Recently, some scholars have also looked into other factors such as the demographics as some of the explanation for the negative growth of the Japan’s economy.

Lessons other countries can learn from Japan’s economic deflationary spiral

Many countries including the US as well as those within the euro zone tend to learn from Japan’s economic policy mess-ups. In fact, most economists point out that Japan’s central bank ignored the warning signs of the economic slowdown and only acted after things have gone worse. The Japan’s central bank disregarded the fact that most of the banks were in serious danger of liquidity due to accumulated debts.

Under such circumstances, the central banks must act quickly and decisively to implement appropriate monetary policies. During the period of economic slowdown, Japan increased government spending ignoring the monetary policies that would create a balance leaving many banks and other financial institutions riddle with huge debts.

However, the economic slowdown was cushioned with increased public savings, which allowed sustained consumption rates. Most countries have learnt these critical lessons from the Japanese economic deflationary spiral.

Measures Japan can put in place to revamp its economic growth

Various policy measures have been employed the country to tame the deflationary spiral over the years. In fact, the economic models such as reducing the interest rates have been applied by the government yet the problem persists. As a result, most economists have proposed new models that can be applied by the Japanese governments to increase inflation.

However, most of these models are yet to be tested. Currently, the Japanese government should consider putting in place measures that will increase wages such as tax credit to companies that augment gross earnings. The other critical step is to put in place measures that would increase the share prices. Such measures include increasing the value of Yen against major currencies.

The implications of Japan’s economic stagnation

Economic stagnation is not good indicators for investments. The stagnation in economic growth is costly and risky for both foreign and local investments. Foreign investors are likely to incur larger costs because of decreased currency value at the same time risk losing returns for their investment due to reduced demand.

Even the local companies that would benefit from exports have increased long-run risks that can only be averted through enlarged domestic demand. Therefore, Japan’s economic deflationary pressures are costly and risky for both foreign and local investments.

Whether to invest in Japan or India’s economies

Many factors are considered while deciding on foreign investments. Economic conditions are one of the factors. Therefore, considering economic conditions of the two countries, India’s economic condition seems to have future growth prospect. In addition, considering other factors such as consumer spending that determines general demand, India economy has increasing trend rather than stagnating seen in Japan’s economy.

Moreover, India’s general public perception of the economic conditions is that of growth and increased spending particularly on the new products. In essence, Japan economy has reached maturity in which future growth prospect is limited while India’s economy is young and growing with increased consumer spending. As such, it would be advisable to invest in India’s economy.

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1. IvyPanda. "Japan’s Economic Stagnation." July 4, 2019. https://ivypanda.com/essays/japans-economic-stagnation/.


IvyPanda. "Japan’s Economic Stagnation." July 4, 2019. https://ivypanda.com/essays/japans-economic-stagnation/.


IvyPanda. 2019. "Japan’s Economic Stagnation." July 4, 2019. https://ivypanda.com/essays/japans-economic-stagnation/.


IvyPanda. (2019) 'Japan’s Economic Stagnation'. 4 July.

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