Question

Please prove an assessment of the Aggregate Demand condition for Japan. An analysis of which AD factors are most relevant to the country’s future growth potential. Please base all of the above information on Japans Consumption (level of GDP and the Consumption schedule Consumption schedule: Wealth, price level, expectations, indebtedness, and most importantly, Tax Levels.

Answer 1

Aggregate demand refers to the ‘total demand of goods and services in the entire market.’

Since 2017, although economic development is seen worldwide, recently Japan has also come across many changes with respect to aggregate demand. Since Japan is classified as a developed country, it is observed that although Japan remains static, there is continuous improvement in resource utilization and in manufacturing cycle, which has also increased the aggregate demand in the economy.

It is also observed that, upto 2016 the GDP had almost remained stagnant, while, there was a low inflation. In 2017, the GDP had started improving while there was also a low inflation.

Further, it is expected that the inflation will increase due the continuous improvement in growth rate which would be achieved due to efficient processes and improvement in technologies.

Due to improvements in efficiency, the expectations of the people will increase and due to increasing inflation, eventually Government would have to increase the interest rates on loans. But inflation would also increase people’s indebtedness.

Increase in efficiency in technology and other improvements also improve the wealth of the people of the country.

In taxation, the main points to be considered are, real income is connected with the taxation of a country. The consumption tax hike in October 2019 would reduce the real disposable income of people, which along with increased prices would eventually increase indebtedness of the people.

Such hike in tax rates would also increase downward pressure on prices because of the inflation and the input-output gap in demand of the country.