Economics (AS & A Level) · Oct / Nov 2023 · Paper 41 · Question 1

Economic decline in 2020 In 2020, Japan suffered its third quarterly decline in gross domestic product (GDP) in a row. The size of its real GDP shrank to its lowest level since 2011 when the country was suffering from 20 years of deflation and economic stagnation. In 2020, the economy was not helped by a previous increase in sales tax, the COVID-19 pandemic and the trade war between the world’s biggest economies, the United States (US) and China. They were Japan’s two most significant trading partners; 19.9% of exports went to the US and 19% to China. Table 1.1 gives some economic indicators for Japan for selected years. Table 1.1 Selected economic indicators for Japan, 2016–2019 2016 2017 2018 2019 Central bank rate of interest (% per year) 0.1 0.1 0.1 0.1 Change in industrial production (% per year) 0.0 3.1 1.1 0.1 Change in retail sales (% per year) 0.6 1.9 1.7 0.1 National debt (% of GDP) 236 234 236 237 Economic growth (% change in GDP per year) 0.5 2.2 0.3 0.7 In 2020, the International Monetary Fund (IMF) warned that the global economy was facing its worst recession since the world depression in the 1930s. Japan’s economy shrank by 7.8% between April and June of 2020, while the US economy contracted by 9.5% and China’s by 3.2%. Japan, which was the world’s fourth largest exporter, incurred an overall trade deficit of US$15.2 billion for 2019, an increase of almost 50% on the trade deficit for 2018. In 2020, exports fell by a further 18.5% in the third quarter, mainly caused by a decline in Japan’s motor vehicle exports. In that quarter, its main car producer, one of the world’s biggest car companies, made its smallest quarterly profit in nine years as sales halved. The government of Japan used expansionary fiscal and monetary policies to try to stimulate the economy. Low interest rates had been used by the central bank since 2016. In August 2020, economists said that despite this stimulus to encourage growth there was a chance economic activity may stagnate even further if major nations again adopted more restrictive measures, such as lockdowns, to combat any reoccurrence of the pandemic. Source: ‘Japan’s economy slides into record decline under pandemic pressure’, Martin Strydom, The Times, 18 August 2020

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