Two among the top twenty economies in the world by both nominal and purchasing power parity (PPP) adjusted Gross Domestic product (GDP), Australia and Japan are not only unique but also similar in a number of ways. While Australia has been struggling with balance of payment deficits due to its position as a net importer, Japan has continued to enjoy balance of payment surpluses due to its position as a net exporter. In contrast, Japan has been struggling with a sluggish economy while Australia has had the longest run of sustained economic growth in the developed world. Trade partners, both Australia and Japan are currently implementing fiscal and monetary policies to spur growth of their economies; Australia in a bid to reduce balance of payment deficits and to maintain the impressive growth rate and Japan to spur the economy out of the slump and improve the current domestic debt to GDP ratio. This essay delves into different aspects of each economy and shines a light on their outlook up until the end of this decade. Of specific concern are the economic indicators namely unemployment, inflation, GDP and trade.
Keywords; Trade, Economy, Purchasing power parity (PPP), Unemployment, Monetary policy, Inflation, Gross Domestic Product (GDP), Fiscal Policy .
Introduction
Among the largest economies in the world today, Australia has a strong mixed market economy which has witnessed a long run of economic growth. Presently the second wealthiest nation after Switzerland in terms of wealth per adult, the nation of Australia mainly trades with Asian nations such as China, Korea and Japan as well as some western nations such as the US. In this essay, the economy of Australia is examined in detail with four key economic indicators namely GDP growth, unemployment, inflation and trade, forming the main points of concerns. In addition, the current fiscal and monetary policies in the nation will be assessed and their suitability (to be determined by how close economic indicators are to policy targets) discerned.
The Two Economies
The Australian Economy
With a nominal GDP of $ 1.39 trillion and a GDP (by purchasing power parity) of $ 1.235 trillion as of 2017, the Australian economy is among the twenty top most in the world by both measures. Based on a mixed market system, the Australian economy is largely dependent on the services sector which contributes sixty one cents in every dollar that the nation gets in GDP, the Australian economy is also known for its booming construction and mining sectors which take up 8.1% and 6.9% of GDP respectively. The manufacturing and agriculture sectors account for just under 8.5% of GDP with the former providing 6% and the latter 2.2% in 2016 as depicted in Fig 1.1 below;
Fig 1.1: GDP of Australia by Economic Sector
Currently the nation has a labor force participation of 12.7 million out of the 24.13 million citizens who mainly live in the urban area. Major natural resources in the country include huge deposits of minerals such as iron ore, aluminum, lead, uranium and manganese as well as natural gas, silver, coal and bauxite. The country is a major exporter of agricultural; products that include wool and wheat. The levels of literacy among persons aged fifteen years or more in the nation are estimated at 99% according to Tyner (2014).
The Japanese Economy
The third largest economy in the world by nominal GDP (at $ 4.884 trillion) and the fourth by purchasing power parity, Japan is a highly developed market economy which is today the second largest economy among developed nations. Mainly dependent on the services sector, the Japanese economy is also largely industrialized and to a very small extent agrarian as depicted in Fig 1.2 below;
Fig 1.2: GDP of Japan by Economic Sector
With a population of more than 127 million persons, the tenth largest in the world, Japan has a labor force participation of 51.2% at about 65 million persons. Among persons aged fifteen years or older, the literacy levels are 99% (Tyner, 2014). The country has very limited natural resources and remains the biggest importer of energy in the world. It major natural resource remains fish. Major exports from the island nation includes electronics, heavy machinery and automobiles.
Economic Indicators
With regards to the two economies, the economic indicators to be considered are economic growth, unemployment, inflation and trade.
Economic Growth
For Australia the economy has grown consistently over the last 103 quarters, the longest sustained period of economic growth in the developed world. In the last five years alone (between 2013 and 2017), the Australian economy has grown by an average of 2.69% and cumulatively by 13.47%. According to Statista (2017a) the economy is projected to continue growing throughout the remainder of this decade; with 2.92% in 2018, then by 2.95% the year after and 2.81% in 2020. In comparison, the Japanese economy has fluctuated variously over the same period, hitting a low growth rate of 16.8% and a high of 12.7% in the five year period, largely due to the fluctuations of the Japanese Yen. According to Statista (2017b) the economy of the South East Asian country is expected to grow modestly in an ever decreasing proportion up to the end of this decade; posting an estimated 3.65% in 2018, then 2.8% in 2019 and 1.43% in 2020.
Fig 2.1: GDP Growth Rates for Australia and Japan (2013-2020)
Unemployment Rate
In Australia, the unemployment rate in the last half decade (from 2012 to 2016) has averaged 5.74% and ranged from a low of 5.22 in 2012 to a high of 6.06% in 2014 and 2015. The rate is expected to drop in the remaining three years of the decade to settle at 4.97% in 2020. By comparison, the unemployment rate in Japan has been low and keeps falling; in the five year period between 2012 and 2016, the rate fell from 4.33 in 2012 to 3.12 in 2016. The average rate of unemployment over that period was 3.68%. Going forward, the unemployment rate in Japan is expected to drop to 2.89% in 2017 before climbing one basis point to level off at 2.9% over the three years to 2020.
Fig 2.2: Unemployment Rates for Australia and Japan (2013-2020)
Inflation
In Australia, the inflation rates have largely remained low in the last six years dipping to 1.28% in 2016 from a peak of 2.51% in 2014. Estimates put the figure at 2.17 in 2018, a rise of 16 basis points from the 2017 projections. The rate is thereafter expected to rise marginally 2019 and 2020 at 2.45% and 2.52% respectively. In Japan, the inflations rates are among the lowest in the world. The last six years have witnessed two years of deflation (2012 at -0.06% and 2016 at -0.11%) and very low rates of inflation in the other years; the highest rate being the 2.76% posted in 2015. Trudging on, the rates are touted to rise steadily from the 0.37% in 2017 to 0.55% in 2018 before crossing the 1% threshold to settle at 1.12% in 2019 and then closing the decade at 1.63%.
Fig 2.3: Inflation Rates for Australia and Japan (2013-2020)
Trade
Australia as a nation trades with several countries and regional blocs around the world. With a balance of payment deficit of $ 9.1 billion largely contributed to by the low value exports World Trade Organization (2017a); the country’s main exports include minerals, natural gas, wool, meat and wheat. In 2016, as World Trade Organization (2017a) points out, the country exported commodities worth $ 190.2 billion to major export destinations that included China, Japan, the European Union, South Korea and USA as depicted in Fig 2.4;
Fig 2.4a: Australia’s main export destinations (By proportion of export value)
Fig 2.4b: Australia’s main Import Origins (By proportion of Import value)
In the same year, the nation imported goods and services worth $ 196.1 billion including cars, petroleum, baked goods, medical equipment and food. The main origin of the nation’s imports included China, the European Union, Japan, the United States and Thailand.
With very few natural resources, Japan as a country mainly focuses on manufacturing and services. It is among the world leaders in the manufacture of automobiles and machinery as well as electronics and high technology consumer goods. It does not however produce much in terms of agriculture and primary commodities (World Trade Organization, 2017b). The main trading partners that the Asian nation has include the US, China, Taiwan, the EU, South Korea and Australia. Japan is a net exporter of commodities; in 2016, its exports totaled $ 644.9 billion and mainly included motor vehicles, iron and steel products as well as spare parts. The nation also exported semiconductors and power generation machines to its main export destination as detailed here-below;
Fig 2.4c: Japan’s main export destinations (By proportion of export value)
In terms of imports, Japan mainly procured petroleum and petroleum products, clothing, coal and audiovisual equipment with the total value of exports being $ 606.9 billion in 2016. The imports’ origins are detailed below;
Fig 2.4d: Japan’s main Import Partners (By proportion of Import value)
Fiscal " Monetary Policies
Presently, the Australian government is on a mission to redirect government spending towards job creation and economic growth. As such, the fiscal policy adopted is largely geared towards achieving such a goal through fiscal restraint as noted by Budget.gov.au (2017). In the medium term, the policy aims to increase incomes both at the household and at the national level in order to spur investment, innovation and employment and thus grow the economy at a constant rate of 1% over the decade that the plan will be implemented. Budget.gov.au (2017) also notes that the “ten year enterprise tax plan” which will seek to lower taxes for companies (to levels that are deemed internationally competitive) will be instrumental in supporting economic growth, providing higher wages and creating jobs. Through budget discipline that the government is currently focused on, Australia hopes to achieve budget surpluses and hence reduce government debt over time. Overall, the plan is for the Australian government to maintain (or lower, where possible) the tax rates while keeping expenditure sustainable in order to achieve a budget surplus and spur the economy.
In terms of monetary policy, the Australian economy tasks the Australian central bank, the Reserve Bank of Australia (RBA) with the formulation, review and implementation of policy. Presently the RBA aims to manage the interest rates in the short run as a means of achieving set policy objectives among which are the maintenance of price stability, economic prosperity for Australia, advancement of the welfare of the Australian people and achievement of full employment (RBA, 2017). To achieve these concerns, the A RBA strive to maintain a low rate of inflation, keep interest rates manageable and preserve the value of the Australian dollar. Among the policies adopted at present is the keeping of the inflation (as indicated by the CPI) between 2 and 3% in the short to medium term. This will, as Reserve Bank of Australia (2017) notes, preserve the value of money and hence enhance the people’s welfare while also encouraging strong and sustainable economic growth in the long run.
Japan’s fiscal policy is aimed at spurring growth in the economy which seems to have all but stagnated in the last decade. The current budget therefore aims to combine, as Kajimoto " White (2017) note, monetary easing and a fiscal policy that is geared towards growth and against spending. Advocating structural reform, the current fiscal policy adopted by the Abe administration prioritizes among other things childcare, advancement of human capital, increasing of productivity and spurring innovation; all of which should help grow the economy. The policy also aims to curb spending on consumption as Shimbun (2012) points out. The government has been on a mission to achieve a 3% nominal growth rate as Sadler (2017a) observes. The fiscal stimuli in the economy though supportive of domestic demand has contributed (along with the low interest rates) to the ballooning of the public debt to GDP ratio as Sadler (2017a) notes.
In terms of monetary policy, Japan’s central bank has been concerned with reviving the economy that is experiencing low to negative growth rates. Among other things, the government has applied the unconventional method of negative interest rates in order to spur the economy as Sadler (2017b) notes by increasing the inflation rates in order to avoid the current deflationary tendencies and thus encourage spending. The central bank hopes to continue easing the monetary policy in a bid to counter the slow economic growth and the appreciating local currency so as to keep inflation at the 2% target.
Conclusion
Both well developed countries, Australia and Japan are heavily reliant on the services and manufacturing industries. While Japan is heavily market oriented, Australia is more of a mixed market economy; Japan as a net exporter has considerable balance of payment surpluses while Australia as a net importer has balance of payment deficits. Australia has had a strong showing in terms of GDP growth while Japan has fluctuated from minimal growth to considerable contraction. Monetary and fiscal policies have been put in place in the Asian nation in order to curb the deflationary tendencies and spur economic activity and thus growth while in Australia, such policies have been put in place to help maintain the positive showing on the economic front and to help the country climb out of deficits.
Reference List
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