Context for question 1
Inflation and economic growth in Japan
The annual rate of inflation in Japan peaked at more than 4% in some months in 2023, the
highest rate for 40 years. Despite this, Japan’s central bank, the Bank of Japan, kept interest
rates low. One economist stated that ‘these low rates of interest should continue to boost
domestic demand.’ For example, they would be likely to encourage private consumption, which is
55% of Japan’s aggregate demand, and investment, which is 24% of Japan’s aggregate demand.
This was a very different approach from most central banks in other parts of the world which
increased interest rates as part of a contractionary monetary policy. A senior banking analyst
in Japan stated that ‘the central bank will maintain the current monetary policy and adopt a
wait‑and‑see stance for the time being.’ However, one important development in 2023 was that
for the first time in two years real wages increased in Japan.
These relatively low interest rates in Japan weakened the value of its currency, the yen. It
depreciated against other major currencies in 2023, falling in value against the US dollar by
more than 10%. Demand for Japanese exports, such as cars, increased as the yen depreciated.
This helped Japan’s economy, the third largest in the world, to grow at almost twice the rate
forecasted by economists. Table 1.1 shows yearly changes in selected economic data for Japan.
| Increase in GDP | 1.8% |
|---|---|
| Increase in consumer prices | 3.3% |
| Decrease in the value of the Japanese yen against other major currencies | –11.5% |
The aim of Japan’s economic policy was to try to balance economic growth with inflation.
Economists recognised that this balance might be very difficult to achieve as there was always
the possibility of a trade‑off between these two aims.
The low rates of interest also encouraged the Japanese stock exchange. There was a large
increase in Japanese share prices in 2023, which rose by more than 9%, with the Nikkei index of
Japan’s top companies reaching a 34‑year high.
Sources: Adapted from ‘Good times return in the land of rising sun’, The Times, 23 January 2024
and ‘Japan’s economic growth beats forecasts as exports zoom’, Reuters, 14 August 2023