The effect of Japan’s reduction in interest rate on AD curve

Japan is known to have very low interest rates. The image below shows the interest rate in Japan.

As you can see from the image, Japan’s interest rate is very low. So how does this have an effect on the AD curve?

First of all, AD, aggregate demand is the total spending in an economy consisting of consumption, investment, government expenditure and net exports. Out of all the factors mentioned, consumption and government expenditure are the two biggest factors. Since the interest rate is very low, two things occur:

1. People do not save money in the bank. (Because the people saving money in the bank doesn’t earn money, they will not place their money in the bank.)

2. People borrow a lot of money. (Because the interest rate is so little, when borrowing money from the bank, the amount one has to pay back is close to the equivalent amount, if not the equivalent amount.)

These two will lead to an increase in aggregate demand. This means that there will be a shift to the right, as the amount of total spending in an economy will increase.

Therefore, we can conclude that when the interest rate is very low, there will be an increase in aggregate demand whereas, when the interest rate is very high, there will be a decrease in aggregate demand.

China surpasses Japan’s economy due to its great population

This article explains how China’s ranking as the world’s second largest economy is merely built on it’s massive population.

China has recently surpassed Japan’s economy and has stolen the second rank for the largest economy but when you compare the population of Japan and China, you will see that the ratio is 1:11. Hence, this massive difference is what enables China to have a greater GDP.

However, even though China has surpassed Japan’s GDP, it’s per capita income is still 1/10 of Japan. Therefore, China has a larger economy, but it is not a rich economy. In other words, the country as a whole is rich, but the people aren’t.

It is said that if China keeps going at this rate, it will be able to surpass the United State’s economy by 2030. (The rate of China’s economy expanding is greater than the rate of the U.S.)

With another GDP measure called, purchasing power parity, (PPP) it proves how products in China are worth less and therefore are cheaper. Furthermore the PPP “[tries] to reflect the differences in costs of living and tend to boost the economic rankings of poorer nations.” An example of this is that in China, a haircut may only cost $1 but the same haircut in the United States may cost $10.

Comments on the Japanese Economy

I interviewed my mother, who is Japanese. She owns her own business, and therefore, she has been affected by Japan’s economy.

1. What are your overall thoughts on the Japanese economy?

I don’t think the Japanese economy is doing well right now- This is not because of the current government, but the old government. The previous government caused the Japanese bubble to burst and wasn’t able to do anything about it.

2. Japan is no longer the world’s 2nd largest economy, and China has taken the spot. What are your thoughts on this?

I think it was inevitable because China’s population was growing whereas, in Japan, the population was decreasing. Furthermore, in China, many products are sold. For example, the coral my company produces isn’t sold in Japan but when we export our products to China, everyone buys it.

3. What do you think Japan needs to do as a nation in order to increase the economy? -or do you think it is fine the way it is now?

I honestly don’t know. I think Japan can improve in the area concerning social security. There aren’t as many children but a lot of elders. Without elders, they will not spend their money and if they don’t spend their money, the economy will never get any better.