Macroeconomics Report: Evaluating Japanese Macroeconomic Variables

This report provides a comprehensive analysis of the macroeconomic environment in Japan, focusing on its implications for foreign investment, specifically examining the potential for Woolworths to expand its business. The report delves into key macroeconomic variables, including economic growth, unemployment rates, inflation, real interest rates, government expenditure, fiscal and monetary policies, and exchange rate fluctuations. It also explores the general business environment in Japan, including aspects such as construction permits, taxation, and credit availability. The analysis highlights the impact of these variables on investment decisions, considering the context of Japan's large food and drink market and the country's reliance on food imports. The report also touches upon the impact of the Global Financial Crisis on Japan and includes relevant data and figures to support the analysis, offering insights into the country's economic performance and its attractiveness as a business destination. The report concludes with an assessment of the overall business climate and future prospects for investment in Japan.

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Executive Summary
The report evaluates the effect of major macroeconomic variables on investment decision of
firm. Australia maintains a good trade and investment relation with many nations. Japan is one
nation with which Australia shares a good relation. Before investing in business of a foreign
nation, it is necessary to find a profitable area of business. Japan possesses a large industry of
food and drink business. The sales from this industry is recorded to be approximately 45 trillion
Yen. The demand of food and drinks is growing at a rapid pace since 2007. However, the
demand has adversely affected during recession year of 2008. With stimulation in consumption,
spending demand regained. In 2013, the grocery and food consumption in Japan is recorded as
107 million tons making this area as an attractive place of business. Woolworths is a major
player in Australian supermarkets. With growth of other retailers such as Coles and Aldi the
company recently loses some of its market share in Australia. Therefore, the company is
considering expansion of its business in countries having a favorable business climate. The food
market in Japan is the second largest in Asia next to China. The reliance of Japan on imported
food items to meet domestic demand gives an opportunity to foreign companies to do business in
this area. Apart from a favorable demand condition, the paper considers general business
environment and the some important macro variables. These include economic growth, condition
of unemployment and inflation, real interest rate, government expenditure, fiscal and monetary
policy tools and finally the nation’s capacity to absorb shocks.

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Table of Contents
Introduction......................................................................................................................................3
Analysis and Discussion..................................................................................................................4
General Business Environment....................................................................................................4
Economic growth and business cycle..........................................................................................5
Unemployment............................................................................................................................7
Average wage rate.......................................................................................................................8
Human Capital...........................................................................................................................10
Inflation......................................................................................................................................11
Real Interest rate........................................................................................................................12
Government Expenditure in the Economy................................................................................14
Domestic Credit to Private Sector.............................................................................................15
Taxation Policy in Japan............................................................................................................16
Government expenditure on Infrastructure................................................................................18
Exchange rate regime and Exchange rate fluctuation................................................................19
Monetary policy in Japan...........................................................................................................21
Impact of Global Financial Crisis on Japan...............................................................................22
References......................................................................................................................................26

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Introduction
In the globalization era, countries are integrated with each other and this provides an
international platform for goods and services. In the integrated world, the investment decision in
one nation depends on macroeconomic environment of the targeted nation. The paper analyzes
feasibility of investment of Australia originated company Woolworths in Japan. The large food
and grocery market in Japan attracts Woolworths to start its business in Japan. The paper shows
the performance trends of Japan in macro indicator and its effect on long-term investment return.
The foremost important area is general business environment. The business environment
refers to the general structures of constriction permit, tax payment, and supply of credit, security
of property rights, exchange facilities and issue of insolvency. The most important macro
variable is economic growth rate that captures the productivity growth of the nation. High
growth rate implies economic prosperity while a low growth rate represents economic
slowdown. The related aspect of economic growth is the employment opportunity in the nation
and prevailing rate of unemployment. Wage rate of workers determine the industrial cost of
production and hence, is important for business. Credit supply determines the scope of business
expansion. The actual borrowing cost is determined from the real interest rate, which is nominal
rate minus the rate of inflation. Inflation resulted from demand side factors enhances economic
growth. In addition to autonomous macro variables, the role of government play an important
role in maintaining economic stability. Government intervenes in the economy using fiscal and
monetary policy tool. Government expenditures are captured under fiscal regulation. The
monetary policy is implemented using different money market instrument. The most commonly
used instrument is interest rate that determines the level of investment. The policy of taxation is
another instrument of fiscal policy tool. It is the only source of government revenue. The global

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financial crisis occurred in 2008 is a major event affecting many nations. The effect of global
financial crisis on a country indicates its shock resistance capacity and stability of the economy.
Woolworths holds an important position in Australian grocery supermarket. Japan on the
other hand comprises of a large food and drink market making Japan a lucrative place for
business investment. In the paper, some of the major macro variables in Japan is evaluated
including the general business environment. In terms of growing consumer demand and import
reliance of Japan, grocery retail business seems profitable. However, the final decision should be
taken only after complete evaluation of economic condition and its future prospects.
Analysis and Discussion
General Business Environment
Favorable business environment makes it easier to start up a business in the nation and
contributes to positive profit earnings in the long term. Before starting business all the necessary
aspects related to a business needs to be observed carefully. The important aspects here are
process of dealing with permission for new construction, property registration, easy mode of tax
payment and other necessary things such as credit availability, power supply and others specific
facilities. Japan has undertaken some reforms to make business operation easier.

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Table 1: Environment for business set up
(Source: The World Bank, 2017)
In 2013, Japan has reduced the corporate income tax rate for business expansion. Now, it
is less costly for companies to operate in Japan and enjoys a larger share of profit. The mode of
tax payment has made easier with introduction of technical specification on the platform of e tax.
The information of detailed tax structure is available is format of comma separated value
(CMV). One disadvantage in Japan is the costly structure of construction permit. The nation has
raised inspection fees that increases cost to the firms. Japan has established a new organization
named Enterprise Turnaround Initiative Corporation to deal with insolvency issue. It initiates
support to companies those are professionally managed but running with excessive debt.
Economic growth and business cycle
Economic growth is one of the major macro variables determining the state of economic
performance. Economic growth is measured in terms of change in Gross Domestic Product

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expressed as a percentage change from the previous year. GDP of the economy is not moves
along a smooth path rather it fluctuates. The spikes in the GDP growth rate is explained with the
phases of business cycle (Scarth, 2014).
Figure 1: Average annual growth rate in Japan and Australia
(Source: The World Bank, 2017)
Some similarities are observed in the trend growth rate of Japan and Australia. The
growth rate in Japan is comparatively higher than that of Australia until 1990. The difference in
growth rate between the two nations has narrowed overtime. After 1990s, growth rate in
Australia exceeds the growth rate in Australia.
In recent years, Japan has accounted a growth rate higher than the last two years. Growth
in Japan has sourced from a soaring in domestic spending. The unemployment remains at a low

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level increasing the confidence for business. The third largest economy in the world has recorded
a GDP growth rate of 4% in the second quarter of 2017 (Partington, 2017). In the previous
decade, Japan was struggling with a low growth rate. To improve the growth scenario, stimulus
is given in the form of easy bank lending, encouragement for investment from private companies
and boosts spending of consumers (Lockwood, 2015). The most significant factor contributing to
Japan’s GDP growth is the increasing consumer spending. This means Woolworths can have a
broad base of consumer demand in Japan.
Unemployment
The incidence of unemployment in the economy is described as a situation where some
members of the labor force fail to find jobs suitable for them. Unemployment is an important
macro indicator that symbolizes level of economic activity (Koba, 2014). High Unemployment
rate symbolizes a week economy implying slow spending and growth.
Figure 2: Unemployment in Japan
(Source: The World Bank, 2017)

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From 1998 to 2002 unemployment rate has increased sharply. After that the figures of
unemployment rate has decreased continuously until 2007. In the last five years, Japan has made
significant progress in improving the unemployment status. Unemployment rate has declined
sharply and reached to approximately 3.2%.
The falling unemployment rate shows a positive sign for the economy (Ehrenberg &
Smith, 2016). The rate of job less in the nation fell slightly. The availability of job as indicated
from the ratio of job offers and job seekers has remained at a stable level. Government in Japan
is encouraging the employers to boost wage (Kitov & Kitov, 2013). The increased wage has
direct effect on GDP through the channel of consumption spending. The shortage of labor is
prevalent non-manufacturing sector like nursing care and medical profession. There is a dramatic
fall in the figures of jobless people. This indicates a clear improvement in labor market
condition. The improved status of labor market is contribute from increasing job opportunities in
information technology, retail and wholesale sectors and construction (The Japan Times, 2017). .
The recovery of nation production and export demand have made positive contribution to the
labor market. The wage growth and land reform has reduced the tendency of overtime in the
labor market and secured an equitable behavior for regular and non-regular laborers.
Average wage rate
Wage is the return given to the laborers for their labor supply. The forces of labor
demand and labor supply determine the market wage rate. An excess supply of labor pushes
wages down while a shortage of labor increases the wage (Goodwin et al, 2013).

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Figure 3: Monthly average wage in Japan
(Source: Trading Economics, 2017)
Monthly wages in Japan has increased at a comparatively slow rate. In October 2016,
monthly wage was 295.62 JPY, which has slightly increased to become 301.704 in August 2017.
In Japan wage declined to 301.70 thousand JPY per month in August from 425.79 JPY in the
previous month. The average monthly wage is 321.06 thousand JPY between 1970 and 2017.
The recorded highest wage was observed in December 1997 when wages became 883.79 JPY
thousands. The all-time lowest wage rate is 52.91 JPY thousand as recorded in February 1970.
Various explanations for slow wage growth in Japan in given. The most recent
explanation given by the Bank of Japan is the higher productivity of worker and low hours of
working. Companies realize waste or labor and they have the ability to raise productivity and
hence output received per workers (Lise et al., 2014). They are adapting the policy of
abandoning low productive work to avoid extra labor cost. The reduced business hours restricts
wage growth by lowering labor demand. This has direct impact on the level of inflation in terms
of slowing the pace of inflation.

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Human Capital
The level of production in the economy depends on the quality of its labor force or
human capital. Human capital involves skill, education and training of the available labor force.
A nation, rich in human capital will constitute high productivity and high growth rate (Manuelli
& Seshadri, 2014). The level of education is reflected in its gross enrollment ratio.
Figure 4: Gross enrollment ratio of both sex
(Source: The World Bank, 2017)
The figure above shows the trend of gross enrollment ratio in Japan. The trends indicates
a steady rise in the gross enrollment. This suggests an improvement in the education level.

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Inflation
Inflation symbolizes a situation of continuous upsurge in the price level. The level of
inflation has significant importance for economic growth. A mild rise in the price level
encouraged the producers to produce more as they can earn a high profit (Galí, 2015). In times of
deflation, the economy shows a downturn.
Figure 5: Inflation trend in Japan
(Source: The World Bank, 2017)
No steady trend is observed in the price level. From 1960 to 1974 price level fluctuates
around 4%. In 1975, the price level reached to a recorded high level of 22%. Following that year,
price level started to decline at a rapid rate. The inflation rate fluctuates around 0 to 2 percent