Essay Example. Economic and Monetary Policy

An economy can be defined as a system of an institution or a state consisting of comprehensive activities associated with the production, distribution, and utilization of limited resources by the society or specific group of partakers. The market value of goods and services, the types of goods and services that can be traded within the nation, and the distribution of resources are largely determined by the economies. Since the global financial crisis (GFC) of 2007-2008, so many states have experienced sluggish economic growth including Japan and the United States of America. However, the economies of these two nations among others have seen remarkable growth and recovery since then. United States' rates of inflation have been equivalently low, raising apprehensions that the United States may experience prolonged disinflation. Japan, on the other hand, has been battling with different phases of deflation. However, through the implementation and administration of economic and monetary policies, the nation is in the course of establishing a better economy.

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Economic and Monetary Policy Of Japan

Japan's economy has been handling deflation phases since the mid-1990s where the rates of change of consumer price index were almost zero. To revitalize both micro and macroeconomic performance and improve the nation's economy, economic and monetary policies must be into effect. There has been a moderate expansion of the economy of Japan. The country's GDP has been on the rise, despite widened output gaps and fluctuations. Overseas economies of Japan have also been doing well with the increasing trend of their exports mostly composed of IT-related and capital goods (Honda, 2014). However, there are potential economical downside risks associated with overseas economies. Unreliability of overseas economies due to trade frictions between different states such as the United States and China and protectionist moves are likely to impact capital outflows in the economy of Japan.

There has been a low establishment of a consumer price index (CPI) collated to the labor market tightening and economic expansions. Besides, there has been extended deflation and low growth, decreasing people's leniency of price rises. Households' income, therefore, needs to increase to mitigate this cautious stance regarding price rises (Adrian et al., 2018). The rise in inflation has also be attributed to transformations in the business framework especially for goods suppliers and service providers, including the company's attempt in increasing productivity, technological advancement promoting such endeavors, and surge in labor involvement by both seniors and women. All the above-mentioned factors have enabled companies not to raise prices. Short term benefits may be realized by this move, however, they are detrimental to upward pressure on prices and wages in the long term. The rise in inflation has been majorly facilitated by enhancement in the widened output gap (Honda, 2014).

To stabilize Japan's economy, the central bank has been performing a robust monetary easing under the Quantitative and Qualitative Monetary Easing (QQE) framework with Yield Curve Control. Banks have also purchased Japanese government bonds (JGBs) at a large scale under the market performance guidelines to keep a positive output gap, which is considered the main driver of inflation rise, for a long duration (Honda, 2014). To achieve this, forward guidance for policy rates have also been introduced by banks to shape financial decision made by investors, business, and households.

Banks of Japan have also been lifting interest in government bonds to zero while maintaining their short-term interest rate goals at negative 0.1 percent (Honda, 2014). I think for Japan to effectively manage its inflation levels, it should consider consistently implementing and administering the above policies and also consider monetary tightening to reduce cash flow in its economy. Moreover, the central bank of Japan should also consider stopping the purchase of long-term bonds to minimize inflation risks associated with purchases of long term bonds to the economy.

Comparison of Economic and Monetary Policies of Japan and the United States

The central bank of Japan has been in the spotlight for effectively implementing monetary policies that are less inflationary than those implemented by some developed states. Japan has achieved this through daily operation procedures not advocated by most monetarists (Honda, 2014). For instance, the Bank of Japan (BOJ) utilizes interbank market rates as its working target in preference to total reserve. The reserve accounting pattern is a combination of and lagged and contemporaneous reserve accounting and the deposit based that is mostly used to compute needed reserves for a particular month grounded on the deposits of that particular month (Honda, 2014). The main concern of the Bank of Japan is to produce and establish a low inflationary environment for businesses. Even though some of their long term policies appear to coincide with some monetarist proposals, Bank of Japan's procedures of operations are different from the stipulated approaches of operations by mainstream monetarists.

By comparison, in the United States, the Federal Reserve also utilizes that is the federal fund's rates, which are interbank market rates, either indirectly or directly through a borrowed reserve aiming schemes as its functioning instruments (Williamson, 2014). However, the Federal Reserve applies contemporaneous reserve accounting techniques endorsed by monetarists. Besides, both the Bank of Japan and the Federal Reserve are not distressed with temporary movements in monetary accumulations and they do not also focus on total reserves. However, it is imperative to note that the Federal Reserve is less concerned with price stability as compared to the Bank of Japan.

Administrations of discount window lending to deal with the aftermath of the recession of 2008-2009, were different between the two states. Discount window in Japan acts as courses of actions intended to supply more cash to banks and the extent of discount window borrowing normally outmatches required reserves levels. In comparison, the correlation of borrowed reserves to required reserves in the United States hardly surpasses five percent (Williamson, 2014). When it comes to the administration of discount window lending, banks in the United States institutes borrowing decisions, and borrowing prerogatives are always subjected to an intricate non-price rationing program (Williamson, 2014). However, in Japan, the Bank of Japan decides the bank borrowing levels up to agreed quarterly levels, borrowing term, and therefore, the constructive interest rates correlated with borrowing.

The two states can improve their economic and monetary policies through establishing high levels of transparency in their markets, developing a stable financial market, creating viable information databases to enable effective monetary and economic policy conducting to make such policies very effective. Moreover, both the United States and Japan should put into consideration Fiscal Policy coordination with monetary policies, for monetary policies to be much more effective. The static fiscal policy leaves the fate of the economy entirely to the monetary policy which cannot be so effective due to its narrow scope as compared to fiscal policies with a much broader scope.

Impact of Japan's Monetary Policies on Its Trade with Other Countries

Monetary policies are macroeconomic instruments used by different states to manage their economics. It is majorly composed of courses of actions taken by monetary authorities with the main intent of impacting the price and accessibility of credit. Monetary policies not only have an impact on a country's economy, but it also affects trade relations with trading partners. Since monetary policies involve control of cash supply in the economy, it will also exert effects on the international stock market (Adrian et al., 2018). Therefore, interest rates change also affects the demand and supply in the foreign exchange markets.

Considering the effects of contractionary monetary policy, it is evident that this policy reduces the ability of stock prices to remain on the lower side of the volatility rates. Besides, it also lowers the overall volatility prices of stocks and that of the transitory component of stock prices, reducing the returns of stocks. It is also prudent to note that when the Bank of Japan increases the short-term interest rate, stock prices likely to lower and a reduction of Bank of Japan rates results in inflation in the stock prices (Honda, 2014). Lower stock prices discourage foreign investors, consumer spending, and equity investments which later affects trade relations between Japan and other countries.

Moreover, when exchange rates are under constant changes, exportation and importation activities are affected influencing the general demand and supply of goods and services. When this happens, foreign trades become very difficult to manage due to the present financial barriers (Adrian et al., 2018). Meaning that the monetary policies of Japan will affect other countries thus, weakening trade relations between Japan and specific states. Additionally, other countries' monetary policies will also affect Japan's economy when thy economically engage with one another (Honda, 2014). Additionally, the implementation of expansive monetary policies, albeit increases growth, it also results in a lower interest rate. As a result, this move weakens the Japanese currency making them import more from their trading associates.

Every state is not immune to monetary policies implemented and administered by its trading partner. Therefore, in the process o stabilizing the economy, Japan should always try to implement and administer monetary policies using different tools such as reserve requirements, interest on reserves, discount rate, and open market operations affecting capital in the banking system in consideration of their foreign trading activities. By doing this, they will always monitor policies that effectively regulate both domestic consumption and production taxes and subsidies that directly influence the nature of imports or exports.

Conclusion

Economic policies are very vital in controlling and influencing the economy of a country. Through setting government expenditures, setting interest and tax rates, the government can control the money supply in the economy and re-allocate income and resources in the society. Additionally, economic policies are crucial in stimulating economic growth, establishing price stability, providing full employment, creating economic security, and efficiency, enabling poised trade and fair distribution of resources and income. Through the implementation and administration of monetary policies using different tools such as reserve requirements, interest on reserves, discount rate, and open market operations, every country will be able to tackle economic challenges and control its trading activities with trading partners without adverse effects as a result of their economic and monetary policies.

References

Honda, Y. (2014). The Effectiveness of Nontraditional Monetary Policy: The Case of Japan. Japanese Economic Review, 65(1), 1-23. https://doi.org/10.1111/jere.12036

Williamson, S. (2014). Monetary Policy in the United States: A Brave New World? Review, 96(2). https://doi.org/10.20955/r.96.111-122

Adrian, T., Laxton, D., & Obstfeld, M. (2018). Advancing the frontiers of monetary policy.