Japan Deflation

Q2. Why was Japan so unsuccessful in solving the problem of deflation over the past two decades?

1. Introduction (102)

Reuters （2014）reports that, the prime minister of Japan —— Shinzo Abe said in Berlin that under his leadership the Japanese economy had grown and he was confident Japan would soon become free from the years of deflation.

When talking about deflation, Japan will firstly come to people’s mind of its experiences during the past two decades. Japan has kept trying to solve the problems, however, most of the strategies that are used to recover its economy have been unsuccessful. This essay will be looking at the causes and impacts of the strategies used by Japan in fighting against the long lasting deflation.

2. Background (232)

Federal Reserve Bank of San Francisco (1999) shows that deflation is defined as an rise in the overall price level over a period of time that represented the opposite of inflation, and has been defined as “A sustained fall in the general price level.” By the MIT Dictionary of Modern Economics.

Japan has experienced the deflation since 1990s. According to Slany and Sudo (2006), the annual growth rate of nominal GDP in Japan was only 0.58% in average from 1992 to 2004 and the annual growth rate of real GDP in Japan averaged 1.10% till 2004. One of the most important factors of the decrease of the economy of Japan was the low performance of TFP (total factor productivity), which implicates that Japan will not be able to achieve the target growth of economy as before the 1900s during to the fact that Japan has become a society with an elderly population (Hayashi and Prescott, 2002).

The growth rate of GDP in Japan

Source: Cabinet Office

Undoubtedly, the continually downturn of the economy has ...

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...stayed at a high level. Japan’s fiscal deficit took 10% out of its GDP at the end of 1998 with a debt dependence degree of 40.3%, 42.1% of 1999, and 36% of 2000. To the end of 2001, the debt of government reached to 607.3122 trillion yen, which occupied 121.41% of the GDP (Bian, 2002). Japan has become one of Western countries with the worst financial situation.

Bian (2002) also pointed out that due to the misestimating of economy situation, the government thought that Japan had started to get out of the recession. Therefore, government turned to tight the fiscal policy by raising the tax of consumption and also cancel the reduction of income tax. The economy of Japan was affected terribly with negative growth of the economy, and the deflation become much more serious.

4. Discussion

5. Conclusion

Works Cited

Bian (2002) Zeng (2002)Saville (2009) (Ueda, 2000)