Japan Showing Bad Signs

Recently, Asian markets have improved, but people have been cautious about Japan. The reason for this is that Japan’s growth has been slowing down very quickly. The Wall Street Journal reports that its GDP grew about 1% in 2013. This was below the expected 2.8% growth. This can also be seen with the weakening of the Yen compared to the US Dollar. The New York Times explores other factors. One of these larger factors was the .5% increase in private consumption. The Times connects this to the proactive spending of an increase in sales tax, which is expected to be imposed in April. The Washington Post, also attributes the slowed growth with the tax hike.

On the bright side, Japan’s currency weakened. This sounds bad, but it implies that each Yen is now cheaper. This means that Japanese assets are also less expensive. People will be more interested in purchasing these assets. When the demand for these Japanese rises, their prices go up, along with the value of the currency. Once this happens, the people, who have assets that are mostly in Yen, will see increases in the value of their assets. From what we can see here, this period of growth can be cyclical. Time will tell and we cannot be certain how much foreigners will be interested in a depreciating Yen. If not, then output could continue to decrease in Japan.

The big picture here is that increased sales taxes seem to hurt growth. What a surprise? Not actually because this can be explained with simple economics models. Using a basic supply and demand graph, we shift the supply curve in when there is a tax increase. The easiest effects to see are that the price level increases and the quantity consumed decreases. The quantity consumed can directly affect output since consumption is a component of GDP. The less obvious effects from the model are the decrease in both consumer and producer surplus. Decreases in surplus are other contributing factors to negative growth. Less surplus for consumers means that they will not have as much disposable income to spend on goods and services. This can hurt output even further. On the producer side, they will profit less with decreases in surplus. When firms see continuous decreases in their profits, they come closer and closer to going out of business. If firms continue to profit less, then the industries suffer, which also hurts output. We can see that increased sales taxes can create chain reactions that lead to decreases in output.