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Japan's economy is struggling. Real GDP was down .6% in the second quarter of 2008 and up 1.0% from a year ago. Nominal GDP was down .6% from a year ago. That comes after a 2.1% gain in real GDP for calendar year 2007 and a 2.4% gain in 2006. The unemployment rate increased from 4.0% to 4.2% in August, the highest in two years.

Consumer prices in Japan were up 2.1% in August from a year ago. On February 21, 2007, the Bank of Japan raised the interest rate from .25% to .50%, the highest level in over ten years. On July 15, 2008, the Bank of Japan said that it expects real GDP to increase 1.2% in 2008-2009. Japan's fiscal year ends on March 31st.

Why has the world's second largest economy been stuck for so long? In short - bad economic policy. For years, the government wrongly believed that public spending would stimulate the economy and a value-added tax would reduce their budget deficits. The result was that the economy tanked (especially retail sales) and the government's deficit soared.

Another problem has been that they believed increased exports were the road to prosperity, so they intervened to keep the yen low, spending a record 20.0 trillion yen in 2003. By increasing public spending and taxes, and undermining their own currency, they discouraged investment in the economy. Put it all together and you have a 13-year (plus) decline that the economy is still struggling to recover from.

As bad as the economic climate has been for the past decade, there are some positives. In terms of economic freedom, Japan's world ranking improved from 39th in 2005 to 17th in 2008, according to the Heritage Foundation.

Japan has a top individual tax rate that can reach to 50% and a top corporate rate as high as 41%. The government spends 37% of their national income, not bad compared to other leading economies. This economy has big potential, but they need a less burdensome public policy.

Courtesy: www.dailyfutures.com

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