Japan Inflation

By: EconomyWatch   Date: 14 October 2010

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Resurgence in the economy of Japan is the need of the hour. Economists as well as analysts are of the opinion that the country should have a touch of inflation in its economy. The economy of Japan is moving at a very slow pace. Japan has to gear up and stop being over optimistic about its economy. Japan inflation is at an all time low. Japan needs some amount of inflation in its economy to avoid getting into a deflationary spiral.
The real scenario in the various sectors of Japan's economy:
The wholesale price index is gradually backsliding and it is being feared that the consumer price index or the CPI will soon follow. But that has not happened yet. In other words, economist are fearing deflationary spiral. Deflationary spiral is a condition in the economy, when low price levels trigger low production and this in turn leads to a chain of events, not quite desired by any economy.

Steps to step up Japan inflation:
Few suggest that, to counteract deflationary spiral, the central bank of Japan, ought to set a Japan inflation target for the country. It can be set, anywhere between 0 percent to 2 percent. . This will automatically lead to increase in demand. It is apprehended that if people become aware that prices are likely to be raised within a few days, they would rather purchase goods beforehand. Japan is presently facing liquidity trap. There is enough productivity but there is no demand. Savings are more than investments. This is happening despite the fact that the rates of interest are almost zero. Rates of interest are so low that it cannot be brought down any more. The reason- an economy cannot have nominal rates less than null. So, a solution has to be worked out, which can address the above problems. Opting for an efficient monetary policy is preferred. To enhance Japan inflation anticipations, the nominal rates of interest should be worked out for a longer term. It can range between 12 years to 15 years. The different economies in the modern times, do not print currency, in the time of crisis. On the contrary, majority of the economies increase their fiscal assets. It may include bonds issued by the government. These transactions are usually taken care of by the commercial banks. But if this process is implemented in Japan, owing to inadequate capital ratios as well as horrendous balance sheets (of banks), there lies a doubt whether these banks will loan out fund to the common man even if the people intend to borrow money from these banks. So, this will not be of much help to Japan's economy.
Output Gap and Gross domestic product:
Studies have furnished information about Japan's gross domestic product or GDP. It was found out that output gap of Japan, was approximately 5% of the gross domestic product. This figure is gradually rising. This implies, that there is an increase in production shortfall.
Japan inflation and its effects on Yen:
Increase in Japan inflation means, value of Yen decreases. The purchasing power of Yen subsides. This could lead to the decline in other currencies of Asian nations, thereby making foreign debts soar. In order to effect Japan inflation, currency of Japan-Yen is required to drop mildly. In other words, Japan ought to have a modest inflation, so that other economies of Asia are also benefited.


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