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Saving is a Good Habit, but also a Bad Habit

Japan’s $15 Trillion Not Enough to Make It a Buy by William Pesek: Click Here

Is saving a good habit? If you look at Japanese people, they save a lot. As a result of assiduous saving, Japanese households have about $15 trillion according to the Bloomberg commentary by William Pesek. Wow, $15 trillion dollars! It’s higher than United State’s GDP of $14.2 Trillion (2008). However, the author acerbically criticized that Japanese people’s habit of saving is actually harming the Japanese economy for several reasons.

As you see, the saving is considered as a leakage along with importing and taxing. Why is saving considered a leakage? It is because the money saved is not used in the economy or market for long period of time. It is like blocking a current of river by building a dam. Saving is necessary, however, excessive saving can result in deflation, which Japan is severely suffering from.

Although the Japanese households have $15 trillion, they do not use it. This is one of the major roots of Japan’s lost decades and current economic crisis. The news columnist William Pesek claims that Japanese people’s saving of consuming is causing the deflation because the market has lack of currency flowing through it. If an economy is compared to a human body, people’s lack of consuming can be compared to low blood pressure. There just aren’t any money to get the economy going. Due to low demands for almost all the goods and services in Japan, the suppliers has to lower the price of their product. And this causes deflation, which William Pesek considers it to be a big problem for Japanese economy. The market is just hamstrung by Japanese’ excessive saving.

Japanese government’s public debt of 200% (to GDP) has resulted from this excessive saving too. Because there is a big leakage (saving) in the market, the Japanese government has to borrow from banks or households and pour it in the market to make it working. If the government do not support the market, the economic crisis would have been more devastating. As a result of trying to pour the money into the market, the Japanese government’s 45% of its spending is from Japanese’ households lending. This has further accumulated the public debt of 200% (to Japanese GDP).

Why are Japanese people reluctant in spending? It is from the lack of confidence about the future. The Japanese government is to be ascribed to the blame. The government did not take aggressive measures to tackle the problem. This has resulted in Japanese people’s distrust toward the government. The government now has to take aggressive measures to tackle the economic depression and encourage the people to spend more.

In sum, saving is a necessary habit, however, it could also hurt the economy if this is done excessively, when no one is willing to buy anything and just save money. I think that the best solution for Japanese economy to rise again to for the Japanese people to spend more again. Just think. If Japanese people spends all of $15 trillion, the GDP will surpass the US GDP. 🙂 yay and Japan will have the top GDP in the world. I personally do not think that that much of spending is worth it :(. Yet, this will be the best solution to the economic crisis in Japan.

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Analysis on Japanese Crisis

Japanese Economy is in Deep Coma

Times Online: Click Here

According to Bronwen Maddox on Times Online, Japanese Crisis resulted from extremely inefficient bureaucracy culture, lack of risk-taking, aging population, and bad governmental budget.

The article states that Japanese government (local and central) have debt over 180% of Japan’s GDP. That means, the Japanese government has to pay almost double the country’s GDP to the lenders, who are mostly Japanese citizens. So, the Japanese government is carrying the unexpectable time-bomb of national bankruptcy. Japan is the second highest in debt percentage to GDP in the world, after Zimbabwe’s 200%. However, Zimbabwe’s GDP is so infinitesimal compared to the world’s second biggest Japanese GDP. So Zimbabwe could get support from other countries, but Japan will not be able to survive the misery even if there were some supports from other countries.

The main reason for Japan’s enormous debt is the Japanese government’s bad planning for budget. According to the article, over 45% of the governmental spending was borrowed from Japanese people’s savings. This kind of spending started from 1992, so this debt accumulated for 20 years until the debt almost went up to twice the country’s GDP. United States had deficit governmental spending just like Japan, however, Obama passed the Budget Plan for 2010 to minimize the deficit and ultimately get rid of the debt. Japan is not taking any actions to minimize and get rid of debts they are carrying. Instead, the new government is increasing the deficit almost forced by its populist economic policies. If the new government does not cancel its policies and sketch a new way to get out of this misery, Japan will face more serious problem than ‘lost decades’ : a bankruptcy.

There why are Japanese government spending so much money? My answer to this question was that Japanese people did not want to use money. That is why the Japanese government has to release money to the paralyzed Japanese market. I have heard and read that many Japanese people had lack of confidence in their futures because of the prolonged economic recession in Japan (lost decades). Even if they have one of the highest GDP per capita in the world, they do not use money in fear of another economic recession. This is called leakage in economic term. So Japan is suffering from deflation because of very very low demands in domestic market. Japanese domestic markets do have money to spend, however, people simply chose not to and save it. That is why Japanese companies are having a bad time in the domestic market. To get back to the point, the Japanese government has to release money in order to get the domestic market going, or else, it will collapse.

This lack of confidence or fear about future is devastating to the economy. This once happened to Korea when it was near national bankruptcy in 1998 during the economic crisis in Asia. People feared for the future and they stopped spending but saving. This had rather devastating effect on the Korean economy. So the government had made up the mind to get help from IMF, the international monetary fund, and cold-heartedly let the lazy banks or companies to go bankrupt. The government has forced many companies and economic figures to reform. The economic reform has resulted in tons of people without jobs, however, Korea managed to get out of the trouble until 2000, which only took them 4 years to overcome the trouble.

Japan, in the other hand, did not take such daring measures to overcome the economic crisis, which started from 1992. As a result, Japan has suffered from two lost decade, and ‘is’ suffering from another losing decade. The Japanese government was not determined like the Korean government so that the economic crisis of Japan has lingered around since 1992, almost 20 years from now.

There is another factor that is aggravating the crisis in a long term. It is the low birth rate. Japan has the birth rate of 7.64 out of 1000 population, which ranks 221th in the world. It was estimated that in 20 or 30 years, there will be 45% of Japanese population with old people over 65. This will reduce governmental income from taxation and aggravate the responsibility the young people have to carry out. Thus, it will have unenthusiastic young people and there will lack of labor in the market. Every economically active young person (at 25-30) will have to take care of 2 elders. This will give disincentive to the young people to get a job. Also, it will discourage the young people not to have babies because it’ll be even more burdensome. Thus, the low birth rate gets worst. The Japanese government has to do something to give incentive for the young people to have babies. Or else, the national will fall into the abyss of low birth rate and ultimately ‘extinction’ of Japanese people.

In sum, the Japanese government has to do something. The Japanese government should first pass a new budget plan in effort to minimize the deficit, and they should pass a new law to encourage young people to have babies. Also, they should get rid of the culture of bureaucracy. Or else, Japan will confront the irremediable problem of bankruptcy.

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Intro to Macroeconomics

Today in the class, we have learned simple diagrams about the economic transactions between firms and households. As you see in the diagram, the households provide factors of production (FoP) to the firms. Firms gives wages or rent for the factors of production provided by the households. The firm then provides the service or good by using these factors of production to the households. The households in reture gives payment to the firms for the service or the good.

We have learned about several economic terms such as GDP. GDP means Gross Domestic Product and it is the Total Value of all Spending in an Economy. It is the Total Value of all final Goods and Services in an Economy regardless of who owns the productive assets.

Unlike GDP, GNP encounters for the total income earned by a nation’s factors of production regardless of where the assets are located. For example, lets say that there is one British businessperson doing business in Japan. His buisness is part of Japan’s GDP, but it is not part of Japan’s GNP. It is the part of UK’s GNP.

GDP per capita is GDP divided by population of that country. It is often used to show how much wealth each person has. However, there is one flaw with this index. If there is a huge disparity between the rich and the poor, like in United States, this value means less compared to when there is less disparity between rich and poor. According to Ms. Q in the class, only 1% of United State’s population owns 49% of financial wealth. So, GDP per capita is not always accurate.

GDP per capita is often used to evaluate one country’s standard of living, however, as it was stated, it is not always accurate. For example, there could be several trillionares and billions of poor in a country. As an alternative, many scholars use HDI to evalute standar of living of countries. It encounters for life expectancy, literacy rate, education, public health system, and etc. It looks at the different point of view compared to GDP per capita. According to the lecture today, Cuba has less thant 5000$ per capita, however, it has almost 100% literacy rate, which shows that it has high standard of living.

Extra Info: GDP can vary according to the country’s currency exchange rate to USD. As GDP is in US dollar, other foreign countries have to convert their currency to USD. For example, if the exchange rate goes down (value: Foreign currency<USD) the total GDP of the nation decreases. On contrary, if the exchange rate goes up, the total GDP of the nation increases dramatically. So this is one drawback to GDP.

There is an economic index called PPP that covers up the problem of GDP. “Purchasing power parity exchange rate is the exchange rate based on the purchasing power parity (PPP) of a currency relative to a selected standard (usually the United States dollar)” (wikipedia.org) So it gets rid of the exchange rate drawback of GDP and gives more reliable data. However, there is one problem with this also. It is very difficult to measure the differences in quality of goods.

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Elasticity: Hovis Case Study

bread

News Article: Click Here

Premier Food’s Hovis has experienced some significant decline in its bread sales. This is mainly because of

  1. Increase in price of bread.
  2. Rival companies keeping the low price.

Hovis’ increase in price of bread was said to be inevitable. They simply could not maintain the price as the production cost were exceeded the selling price. Consumers have turned their back on Hovis for following reasons.

  1. Whenever there is an increase on price of a product, the demand decrease. It’s the law of demand. (The degree of its decrease is determined by its elasticity). So the consumers started to buy less of their bread.
  2. Usually, bread are told to be inelastic. However, in the article it reported that there are 2 other rival companies selling bread. This has made a substitution effect for Hovis’ bread. Therefore, it has made the bread elastic.

It’s simple. There are other companies selling low-price bread, but Hovis rose its price. No consumer would leave a cheap bread to the side and buy Hovis’ expensive bread.

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Human Development Index

Human Development Index is an alternative statistical data to GDP for indicating human development in each country.

It looks at 3 big categories: 1) long, healthy life, 2) knowledge, and 3) a decent standard of living. Specifically, they look at life expectancy, literacy rate, education, and GDP per capita.

I have researched China about its HDI. It ranked 94th country, and its HDI was 0.762 (out of 1). From this data, I have realized that even though China has the GDP of ranking top 3 in the world and economic growth rate of 9% every year, they were irrelevant. GDP and economic growth were not quite related to human development of countries.

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Opinion: Japan Recruits Foreign Nurses to Care for Elderly

800px-Flag_of_Japan.svg

Click Here: News Article

Just like U.K., Japan is recruiting foreign nurses to solve the problem of scarcity of nursing workforce. This is a typical problem for many developed countries with large old population.

In my opinion,  Japanese government’s decision was somewhat hasty. Although there are influx of international population in Japan, Japan is still considered to be ‘xenophobic.’ The recruitment of foreign nurses would surely stir some problems such as discrimination. Even the response of Japan Nursing Association was somewhat xenophobic. This problem would not be apparent initially, however, it could be aggravated to diplomatic problem between Japan and the foreign country.

Other than problems of Japanese’ detest of foreign nurses, there is another problem with this decision. Most of the recruitment of foreign nurses were made in developing countries. If Japan recruits all these medical workforce, developing countries might have shortage of medical resource. It would be snatching away doctors and nurses from developing countries which would need the most medical support.

About developing robots to nurse the old population, I think that it is somewhat inhumane. I think that old people should be nursed through social interaction, not with mechanical interaction.

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