Question

If it's so easy to "cure" deflation, explain why Japan struggled to inflate prices? Describe some of the ways in which Japan did try to fight deflation?

Answer 1

Recent price increases do not lift Japan's inflation Labor shortages force businesses to raise costs, but CPI remains close to zero Nissin cup noodles will soon cost 4-8 percent more Nissin cup noodles, a student favorite, will soon cost 4-8 percent more and ice creams will rise across the board. Coffee drinkers are not free either: Starbucks Japan has secretly boosted a cappuccino's value by 10 yen to 20 yen ($0.09-$0.18). Spring has brought the largest consumer price increase explosion in decades. The rises are specifically correlated with extreme shortages of labor, raising the prospect of an escape from decades of on - and-off deflation.But the phenomenon also illustrates a paradox: there is no indication of any rise in broader Japanese inflation indexes such as the consumer price index, which in January was only 0.4% higher than a year ago, except volatile items such as fresh food and fuel. The Bank of Japan's message is that even signs of a red-hot economy may not be enough to drive inflation towards its 2% target. When sales fall after a price rise, the consumer goods companies could raise the supermarket promotional rebates, effectively reducing the price back again. Through lowering their own margins, retailers can also bear some of the price increases

Deflation is a serious economic issue that can worsen a crisis and turn a recession into a full-blown depression. If prices fall, or businesses and individuals are expected to fall in the future, they choose to hang on to cash rather than spend or invest. It results in a drop in demand, which in effect causes businesses to cut production and sell stocks at even lower prices.

Not only are prices off target, a negative interest rate side effect is now evident in Japanese banks' worsening profitability. The reason is simple: although the BOJ forces commercial lenders to park more of their surplus funds with it at minus 0.1 per cent, it is not that easy for banks to pass negative interest rates on to depositors. That's because people have an alternative that pays a guaranteed rate of zero per cent: cash.

Thus, under negative interest rates would be a part of Japan's money supply. Higher spending would stimulate inflation. The Japanese currency would weaken if people try to get around the problem by swapping the yen gift into dollars. It would also be inflationary. Then the interest rate on bank reserves could be raised to zero, providing much-needed relief for banks. Ultimately, the BOJ could make helicopter money its main policy tool, and unwind buying dated government securities, ETFs, and corporate bonds, allowing asset markets to function again normally.