- Christopher Wood, a broker of CLSA, argued that inflation which was caused by rising domestic demand would make a positive effect on Japan's economy. The last economic recovery depended on exports. However, now, inflation would make Japan's economy recover. The reason that is the inflation was not only caused by higher prices for oil and food but also caused by high domestic demand. However, there were some contrary voices. John Richards, from the Royal Bank of Scotland in Tokyo, stated that higher prices of food and energy were the main causes of inflation which happened in Japan. He argued that higher prices of food and energy not only rising the cost of exports but also rising the cost of domestic operation and living which meant reducing companies' profit margins and workers' real income. There was evidence to prove that company profits were falling and consumers are reducing extra spending. Inflation may be not good for Japan's economy. But every coin has two faces. It also maybe not bad. Now the interest rate was only 0.5%. It has fallen a lot since the 1990s. No interest or low-interest rates savings seem to be good investments in deflation years. There still were 51% of Japanese households' financial assets which were invested in this way. However, because of inflation, the real interest rates were negative. It would change Japanese investing behavior to invest in other investments such as shares and property. Inflation would take some form such as external shock to change Japanese group behavior. It had already happened which to prevent rising interest rate.
- However, low-interest rate meant that companies can get cheap credit to keep going. There was no pressure for them to make higher profit and reform. Use macroeconomic theory to explain the cause of deflation in Japan. Do you think deflation is good for an economy? Explain. Deflation usually is defined as falling average prices. According to macroeconomic theory, it should be considered that changing the money supply can affect prices because of the changing overall volume of spending. Less money supply means less spending which also means lower prices. However, according to figure 1, during the deflation period which was from 1990 to 2001, the Bank of Japan reduced the discount rate and kept it at a low level. Therefore, there was not a contraction of the money supply which caused deflation. Therefore, the cause of deflation in Japan was the rising of supply in most years. What is more, the cause in 1993, 1998, 1999, and 2001 was the fall of aggregate demand. There may be other cause which was Irrational Expectations. Japan suffered serious inflation before the deflation period. In post-bubble deflation years, ordinary Japanese was still afraid of inflation. Their risk-averse performance made the economic situation in a bad circle. Deflation is not a benefit or a disadvantage for an economy by itself. However, in this case, which happened in Japan, deflation is a benefit for the economy of Japan. In the deflation period, the price level was low. It is a benefit for export. Someone argued that deflation lower sales revenue and profits which also lower the GDP. However, there is no sense to compare the GDP and sales revenue in the deflation period whit which in the inflation period. In my opinion, Japan's economy just regressed from inflation.
- What sort of monetary policy was the Japanese Central Bank (BOJ) following to solve the deflation problem? Do you think that the Japanese Central Bank was successful in solving the problem? Lowering the interest rate was the monetary policy that the Japanese Central Bank following to solve the deflation problem. Considering the theoretical argument, lowering the interest rate will increase consumption and investment. What is more, lowering the interest rate will also reduce the demand of domestic currency. It will force the domestic currency to depreciate which is a benefit to export. As we know, GDP= C (consumption) +I (investment) + G (government spending) + NX (net exports). This will increase aggregate demand, which will make the AD curve shift to the right to increase the price lever to solve the deflation problem. It is hard to consider that the Japanese Central Bank was successful in solving the problem. However, it is a effective way to prevent the deflation going to be worse. As we can see in figure 3 which was presented in the article, Japan's consumer prices increased a little bit every year since 2002 which means the deflation was controlled.
- Deflation has boosted the Japanese exports on the one hand and on the other hand, the Japanese Central Bank has kept interest rates low to solve the deflation problem - what impact do these two effects have on the Japanese foreign exchange market. On economic theory, Japanese exports increase because of deflation. Deflation will lower the price level which will also lower the Japanese export prices. It will bring a benefit to Japan's exports which is the lower the price is the more demand for Japanese exports there will be. Thus the demand for Japanese Yen will increase because foreign countries will purchase much more Japanese Yen to import Japanese products. Therefore, the Yen would appreciate it. On the other hand, when the Japanese Central Bank has kept interest rates low to solve the deflation problem, according to the law of demand and supply, the demand for Japanese would decrease then the value of the Japanese Yen will decrease. 5. In the third paragraph of the second page of this article, the author has argued that, because of deflation, "company profits are now falling..." and "consumers are also showing signs of belt-tightening" -Use the relevant microeconomic theories to analyze such behavior. As we know the price will fall in the deflation period. Companies will reduce the quantity of production supply because of lower prices. The sales of companies will also fall because of the falling prices and the falling quantity. However, the costs can not fall faster than prices. The reason is that even though we ignore the cost of goods there will still be the costs as depreciation of fixed assets and cost of good sold. Therefore, the costs decrease slowly than prices do. As we know, Profit= (Price - cost)*quantity Considered on what we discussed before (Price fall, cost fall less than price, quantity fall), then we get that the profit of the company must fall. On the other hand, wages also fall because of deflation. Consumers earn less than before which will reduce spending. That is the reason why consumers are also showing signs of belt-tightening.
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