Economic Policy in Japan 2010 (2)

Why has the Japanese economy been in deflation during the last 10 years ?
It is a strange and serious problem for our economy and in the developed countries, only Japan is in deflation.

Generally the cause of deflation is determined from both sides of supply and demand. According to data analyzed from the demand side, there is said to be a huge shortage of demand compared to that of supply, which has resulted in a large gap between the two sides.

The size of the gap has been measured to be about 35 trillion yen making it difficult for the government to effectively balance this problem. Further exacerbating this is the already about 800 trillion yen in national bonds the government has issued, not leaving much room for new bonds to assist in public works projects and tax cuts.

Subsequently, monetary easing policies have been proposed by many economists which have been referred to as Monetarists. They insist the reason for deflation is a shortage of money compared to the level of consumer commodities, and as a result, the Bank of Japan (BOJ) decided to take a zero-interest rate policy and set up a 35 trillion yen fund to fuel the money markets.

In Japan, it is not clear whether monetary easing policies are effective for deflation, but to some extent they seem to have some positive effects for the economy.

From a viewpoint of the supply side, it is said that during the last decade, many cheap products have been imported from developing countries, which lowered the domestic consumer prices.

Therefore it is indispensable for Japanese Inc. to implement structural reforms and to rebuild new business models in response to the new economical environment. Innovation is required to overcome deflation in Japan.