Devaluating Yen, Economic Growth of Japan

Introduction.

The purpose of this report is to discuss multiple subjects connected to the current state of the Japanese economy. We will give a general overview of the country, and discuss what makes it unique in the global economy. We will briefly discuss factors to economic growth and development. After this general overview we will go into the policies of the Japanese government in the field of finance. We will discuss the Japanese government using a currency devaluation tactic to their advantage. Devaluing currency to promote economic growth is no new concept in the international market. We will go into the short-term effects of currency devaluation; specifically, short-run inflation, the exchange rate and the stock market. This paper will also explain how these are all interconnected and how currency devaluation causes serious changes to them. A long run analysis will review the overall feasibility of this strategy, and discuss the likely outcomes of it. Finally, we will discuss the steps necessary for Japan to achieve their desired level of growth through this process, and give our opinion on whether or not we this this is the right time to invest in Japan.

Overview of Japanese Economy

Japan maintains one of the top economies in the world, alongside the US and China. They are currently members of the Group of Eight (or G8), a collection of eight of the largest eleven economies in the world, who together hold more than 50% of the world's nominal GDP. The Group of Eight members can be seen in the figure below.

Currently, their economy is the third largest in the world when measured by nominal GDP, the fourth largest when based on purchasing power parity, and the second largest developed economy . Japan is also the world's largest international creditor. According to Marc Chandler, the global head of currency strategy for Brown Brothers Harriman, "It does not seem to be a function, as some suggest, of its trade surplus, but rather its position as a net international investment surplus country. That means that Japanese investors own more foreign assets than foreign investors own of Japanese assets."

Recent Economic History

For all its promise, however, Japan has seen a history of economic volatility. Following the events of World War II, both the USSR and United States believed that focusing on national defense was vital to their countries' wellbeing. Japan, however, focused instead on its own economy. This led to the period from the 1960s into the mid 1980s known as the Japanese post-war economic miracle. This growth rate can be seen in the figure below.

Japan saw enormous economic growth during this time, and was then able to establish itself as a world leader, taking advantage of the Cold War for its own financial benefit. Soon after, however, the