Hi All,
Here is the forum to post your blog-post 2. Milestone 3 comprises of reading from Weeks 5 and 6. Include these key requirements in your submission:
How does the policy of the Federal Reserve bank as well as the Central bank of its key market affect the company’s economic growth? Remember, if your home market is not the US, you would need to use their Central market and not Federal Reserve Bank.
Effect of fiscal policies of the home country and one key market on the company.
Paper length should be at least 5 pages (including cover and reference pages).
Use a minimum of 3 professional references (do not use Wikipedia, blogs, vlogs or any pedias)
Paper should be written in APA including Times New Roman, 12 font, double space, paragraphs indented, subheadings used.
Note that references provided must have corresponding in-text citations within the paper
Toyota Motor Company
Thomas Larkin
College of Arts & Sciences, Regent University
ECON 230: Macroeconomics
Dr. Bajah
Sunday, October 2, 2022
Toyota Motor Company
Economic Policy of the Bank of Japan
Japan’s central bank is the Bank of Japan, whose job is to print money as needed, and keep inflation as stable as possible (Bank of Japan, n.d.-b). This is because, in their view, keeping inflation stable is the best way to promote overall growth in the economy (Bank of Japan, n.d.-b). Let us look at what they have been doing in the last three years to meet this objective. The interest rates of Japan are somewhat difficult to track, as not many reliable sources talk on the matter. However, there are some things we do know. We know that from 2015 to 2017, the real interest rates rose dramatically, from -0.9 to 1.1 (The World Bank, n.d.-c). We know that during that same period, interest payments were steadily decreasing (The World Bank, n.d.-b). This holds true all the way to 2020 (The World Bank, n.d.-b). However, what we do not know, is the real interest rates from 2017 to 2021. However, this does not stop us from seeing what the Bank of Japan has been trying to do to influence interest rates. Ways of influencing interest rates include a required reserve ratio, interest rates on reserve, and bond trading. Looking at the required reserve ratio, we see something rather interesting. There are different required reserve ratios for different sized companies. This makes sense, as the smaller a bank is, the less of an impact it will make on the economy if it goes bankrupt. On non-timed deposits, we see a large difference between the maximum and the minimum required reserve ratio. The minimum is 0.1, for all banks with more than 50 billion yen and less than 500 billion yen in non-timed deposits (Bank of Japan, n.d.-a). This goes up dramatically to the 0.8 range for banks with 500 billion yen to 1.2 trillion yen (Bank of Japan, n.d.-a). Any bank with more than 1.2 trillion yen in deposits is required to keep 1.3 percent in reserves (Bank of Japan, n.d.-a). As for timed reserves, they are more or less the same, with slightly less required reserves (Bank of Japan, n.d.-a). What this shows is that the Bank of Japan is promoting a lot of spending in the economy. With this in mind, it would make sense that they would try to have low interest rates. However, there is another method central banks use to influence the economy, which is much more telling on what they want the interest rates to be. This is the interest rate on reserves. The interest rate on reserves is the amount of money a central bank pays to other lending institutions to store their money in the central bank. Most of the time, this is used to try to make lending institutions stop lending as much, or to make them make much more effective loans. However, this is usually a positive value. This is not the case for the Bank of Japan. The Bank of Japan has had negative interest rates of 0.1 percent since 2016 (Bank of Japan, 2016). In other words, if a bank stores any more than the required amount in the bank of Japan, that excess will be taxed (Bank of Japan, 2016). This is a very unusual policy, but its effect is clear. It encourages low interest rates, lots of lending, and keeps the Federal Funds rate at a negative amount. This once again shows the Bank of Japan is trying to increase spending, loans, and economic activity. With this in mind, while we do not have exact figures on current real interest rates, it is safe to say the Bank of Japan is trying to keep them low. So, how does this effect Toyota? Well, first of all, it is a boost to sales in Japan. If people can easily obtain loans, that incentivizes them to buy new cars. This is beneficial to Toyota. Though, with that said, since Toyota’s cars tend to be practical, not luxurious, this could also cause many of their customers to buy more expensive cars than what Toyota usually offers. The other thing that the Bank of Japan’s policies do is make it easy for Toyota to obtain materials and funding. Since getting loans is easy, and the Bank of Japan is encouraging buying, that would lead to lower prices for parts, and an easier time getting loans for various projects.
Economic Policy of the Federal Reserve
Now that we have seen the economic policy of the Bank of Japan, it is time to turn our attention to the central bank of the key market, the Federal Reserve, also known as the Fed. As is the case with Japan, having easily available loans and a lot of spending would be ideal for Toyota. With this in mind, let us look at the economic policy of the Fed. During the last three years, we can see how the Federal Reserve reacted to the Corona Virus. In 2019, real interest rates were nearly at four percent (The World Bank, n.d.-d). By 2020, when the Corona Virus reached the U.S., we can see the real interest rate dropped to around two percent (The World Bank, n.d.-d). This in itself would be dramatic, but the average real interest rate in 2021 was negative two (The World Bank, n.d.-d). In other words, the money you would get from interest would lose enough value to inflation, that you would be losing buying power. What this shows is that the Fed, like the Bank of Japan, was working to increase spending. However, this is not the only thing the Fed did to combat the drop in spending caused by the virus. Looking at the required reserve ratio, we see something rather odd. In 2020, the required reserve ratio was zero percent (Federal Reserve, 2022). This policy is still in place. To get an idea of what the required reserve ratio was normally like, let us look at 2019. During that time, any bank with less than 16,300,000 dollars in deposits did not have to have any deposits in reserves (Federal Reserve, 2022). Any lending institution with less than 1.24 billion dollars in deposits had to keep three percent in reserves (Federal Reserve, 2022). Finally, any institution above that would have to keep 10 percent in reserves (Federal Reserve, 2022). This makes sense, as larger institutions have a much bigger impact on the economy. Looking once more at the interest rate on reserves, also known as the Federal Funds rate, we see an interesting trend. During 2019, the Federal Funds rate was slowly going down (2.25 percent to 1.5 percent), until 2022 (Tepper, 2022). Once the pandemic hit, it plummeted down to zero percent (Tepper, 2022). Since then, during 2022, it has slowly been recovering, and is now at 3.15 percent (Tepper, 2022). By decreasing the Federal Funds rate, the Fed was hoping to once again, increase spending. This is all good for Toyota. Since the U.S. is their largest market, having it easy for consumers to obtain loans, and having a lot of spending, is beneficial to their business. This is due to all the aforementioned reasons.
Economic Policy of Japan
Looking at the budget of Japan, we see an expansionary policy. While Japan appears to have a policy where their expenditures are always equal to or less than their revenue, we can still gain some useful information. For example, we can see that from 2019 to 2022, their spending increases each year, from 101,457.1 to 107,596.4 billion yen a year (Bank of Japan, 2019, 2020-a, 2020-b, 2021). We can also see that while it increases each year, it increased significantly more in 2021, from 102,658 billion yen to 106,609.7 billion yen (Bank of Japan, 2020-a). This is likely due to the Japanese government reacting to the Corona Virus, as we see the majority of that increase in spending comes from special expenditures, which are used to react to crises (Bank of Japan, 2020-a). Yet, their spending never went above their revenue (Bank of Japan, 2020-a). One thing to keep in mind is that a tax cut is equal to an increase in spending. The former puts more control into the hands of the market, and the latter puts more control into the hands of the government. With this in mind, we can see that the increase in spending is the Japanese government temporarily coming in to course correct the economy. To determine how effective this policy is, we have to look at the multiplier. The multiplier is an idea that represents whether government spending is wasted. Any multiplier below one, and it is a detriment to the economy. A multiplier above one is a benefit to the economy. While no data on the Japanese multiplier exists past 2018, we can still make some assumptions. Looking at trends in recent years, we see that the multiplier of government spending is going down over time (Mihira, 2022). This makes sense, as the unemployment rate of Japan has been going down for quite some time (The World Bank, n.d.-e). However, in 2020 and 2021, the unemployment rate increased. While not guaranteed, there is a possibility that the government spending was better than a tax break.
Economic Policy of The U.S.
The economic policy of the U.S. is currently contractionary in nature. Looking at the federal budget, we are seeing tax increases all the way to 2031, from 3,421 billion dollars to 6,643 billion dollars in taxes (Biden, 2022). As for spending, it is going down from 2021 at 7,249 billion dollars to 2022, at 6,011 billion dollars. After that, it raises very slightly to 6,013 in 2023, and this will hold to 2024 at which point it accelerates to 6,187 billion dollars. (Biden, 2022). This is likely due to the rise in the debt held by the public, which is projected to increase rapidly during this time (Biden, 2022). As a general rule, monetary policy is best used during disasters to incur long terms debts for short term gains. The idea is that we can prevent long term damage to the economy through the bankruptcy of many businesses, then we can use the economy after the crises to pay off the debt. We can see this in action, as spending is decreasing from 2020, when much of the disaster relief was taking place (Biden, 2022). We also see taxes increasing, likely to try and pay off some of the debt incurred during 2020 and 2021 (Biden, 2022). However, it should be noted, even with this contractionary policy, the debt and the inflation rate are rapidly increasing (Biden, 2022; The World Bank, n.d.-a). One problem the U.S. has is that, while it incurs debt during disasters to ease the effect, it never actually pays off that debt. It just accumulates it more slowly. Which could prove to be harmful to Toyota, as not many people buy new cars during bad economic times. While a case could be made that since Toyota’s cars are reliable, it would boost sales, people would be more likely to get a used car if they were looking for a replacement. One last thing of note is that in 2024, (the last year of the Biden administration) we will see spending increase, as opposed to the decrease of the previous three years (Biden, 2022). This is likely the current president trying to make the economy boom long enough for him to get reelected. While this is helpful to Toyota in the short term, it will likely be harmful in the long term.
References
Bank of Japan. (n.d.). Reserve Requirement Ratios. Retrieved September 29, 2022, from https://www.boj.or.jp/en/statistics/boj/other/reservereq/junbi.htm/#p01.
Bank of Japan. (n.d.). Outline of Monetary Policy. Retrieved September 29, 2022, from https://www.boj.or.jp/en/mopo/outline/index.htm/.
Bank of Japan. (2021, December 24). Highlights of the FY2022 Draft Budget. https://www.mof.go.jp/english/policy/budget/budget/fy2022/01.pdf.
Bank of Japan. (2020, December 21). Highlights of the FY2021 Draft Budget. https://www.mof.go.jp/english/policy/budget/budget/fy2021/01.pdf.
Bank of Japan. (2020). Japanese Public Finance Fact Sheet. https://www.mof.go.jp/english/policy/budget/budget/fy2020/04.pdf.
Bank of Japan. (2019, January 18). Highlights of the Draft FY2019 Budget. https://www.mof.go.jp/english/policy/budget/budget/fy2019/01.pdf
Bank of Japan. (2016, September 21). New Framework for Strengthening Monetary Easing: "Quantitative and Qualitative Monetary Easing with Yield Curve Control". https://www.boj.or.jp/en/announcements/release_2016/k160921a.pdf.
Biden, J., R. (2022). Budget of the U.S. Government Fiscal Year 2022. GovInfo. https://www.govinfo.gov/content/pkg/BUDGET-2022-BUD/pdf/BUDGET-2022-BUD.pdf.
Federal Reserve. (2022, January 4). Reserve Requirements. https://www.federalreserve.gov/monetarypolicy/reservereq.htm.
Mihira, T. (2021). Causes of Fiscal Multiplier Decline in Japan. Public Policy Review, 17(2), pp. 1-41. https://www.mof.go.jp/english/pri/publication/pp_review/ppr17_02_05.pdf.
Tepper, T. (2022, September 21). Federal Funds Rate History 1990 to 2022. Forbes Advisor. https://www.forbes.com/advisor/investing/fed-funds-rate-history/.
The World Bank. (n.d.). Inflation, consumer prices (annual %) - United States. Retrieved September 30, 2022, from https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?end=2021&locations=US-JP&start=1960.
The World Bank. (n.d.). Interest payments (current LCU) – Japan. Retrieved September 29, 2022, from https://data.worldbank.org/indicator/GC.XPN.INTP.CN?locations=JP.
The World Bank. (n.d.). Real interest rate (%) – Japan. Retrieved September 29, 2022, from https://data.worldbank.org/indicator/FR.INR.RINR?locations=JP.
The World Bank. (n.d.). Real interest rate (%) - United States. Retrieved September 29, 2022, from https://data.worldbank.org/indicator/FR.INR.RINR?locations=US.
The World Bank. (n.d.). Unemployment, total (% of total labor force) (national estimate) – Japan. Retrieved September 29, 2022, from https://data.worldbank.org/indicator/SL.UEM.TOTL.NE.ZS?locations=JP.