Japan economy remains mired in recession despite attempts by Government to stimulate economic growth over years. The Gross Domestic Product (GDP) growth is not as great as it was before asset-price bubble. The monetary measures implemented by Japan new government to solves two-decades of sluggish growth has been brought up to G20 meeting at Moscow on February 2013, to determine on its compatibility with G20 agreement. It has been endorsed by G20 communities for its important role in global economy. Economist anticipated recovery would be slow as deflation has raged in Japan for near to two-decades. This paper examines the deflation issues in Japan; to shed some lights on the causes of deflation and several issues arises from prolonged deflation. Lastly, new stimulus package to expand economy will be highlighted. The effectiveness and potential side effects of policy will be discussed.
Deflation, which was not a serious monetary issue has entrenched and gained attention globally for its prolonged effects in Japan. (Bernanke, 2003). According to Blink and Dorton (2007), deflation occurs when average price level has generally declined. Deflation refers to situation where inflation rate falls below zero zones. It is categorized into two board explanation. “Good” deflation finds it source from improvement on supply side of economy. As graph (1) refers, increased Aggregate Supply (AS) will increase the real output and leads to decline in price level. “Bad” deflation results from demand side of economy. As graph (2) illustrates, fall of Aggregate Demand (AD) will result in decrease of price level and output.
As consumer, one might be pleased with decline in general price level as more goods and services can be purchased with same amount of money. However, sustained deflation will bring negative impacts to economy. Household become pessimistic on the economic future and defers their consumption of durable goods in hope of further decline in price level, leads to...