Deflation has been the biggest concern for the Japanese economy in the last 10 years. This trend has depressed the economic growth of Japan and held down the increase in wages. Under deflation, it is extremely difficult to set order for national finance.

Currently, the yen has been rising rapidly and a strong yen is generally unfavorable for Japanese exporters. As Japan is often called an export-led economy, the higher yen has driven down stock prices.

In order to deal with the strong yen and deflation, on October 5th 2010, the Bank of Japan (BOJ) decided to return to a zero-interest rate policy for the first time since July 2006, and this rate will be maintained until the end of deflation is in sight.

As a stimulus measure, the BOJ decided to set up a \ 5 trillion fund to purchase a wide range of financial assets including; long-term Japanese government bonds, exchange-traded funds and real estate investment trust funds.

As a result to this announcement, the Nikkei average rebounded sharply on the Tokyo Stock Exchange, however this was short lived as the yen dropped back to \82 from \84. The reason for this temporary gain is that the U.S.
economy has been showing signs of stagnation and U.S. interest rate is projected to fall ever further.

After all, the Japanese economy still depends greatly on the U.S. and it is important to our economy that the U.S. economy recovers quickly. It is also important to note that neither country should consider protectionism or a cheap-currency policy. It is vital that both the U.S. and Japan expand their domestic demand to create much needed employment opportunities.

That said, it is fair to say that after the change of regime, the DPJ have done almost nothing new for economic policies in Japan, and have only continued to implement policies that had been started from the LDP-NEW KOMEITO coalition administration.