For the last several quarters, Japan has been growing at a
feverish pace economically. This trend is due, in no small part, to an increase
in their exports, which has increased on average of about six percent over the
last three quarters. Japanese consumers have decreased spending by about two
percent and there has been modest expansion of business investment during this
same period. This is all good news, right? Who wouldn’t be content with these
economic results? There is a small catch, since the 1990s Japan has instituted
and over the years has ratchet-up a program of deflation, carried out by its
central bank. As the central bank injects liquidity into the economy, prices
subsequently fall, but so does the value of their currency, the Japanese Yen. This
has presented an attractive opportunity for foreign investors looking for cheap
investments, and foreign consumers looking for cheap foreign goods. Naturally,
this has had a positive effect on Japan’s GDP, which explains the six percent
increase in GDP over the last year.
What are some of the lasting effects of this deflationary
tactic? One argument would be that this
could inhibit growth; By keeping prices so low for so long, year over year this
removes money and capital from businesses and this will continually lead to a decrease
in investment domestically, which would could lead to economic stagnation. On the
other hand, the Japanese government could keep instructing its central bank to
pump money into the economy and count on consumers to make up the difference in
economic activity, in other words, consumption. But would the latter pass
economic muster? Especially since Japanese consumers and the domestic sphere
has been saving over the last year, instead of spending to keep the economy growing.
https://www.nytimes.com/2017/11/14/business/japan-economy-gdp.html?rref=collection%2Ftimestopic%2FInternational%20Trade%20and%20World%20Market&action=click&contentCollection=timestopics®ion=stream&module=stream_unit&version=latest&contentPlacement=9&pgtype=collection&_r=0
https://www.nytimes.com/2017/11/14/business/japan-economy-gdp.html?rref=collection%2Ftimestopic%2FInternational%20Trade%20and%20World%20Market&action=click&contentCollection=timestopics®ion=stream&module=stream_unit&version=latest&contentPlacement=9&pgtype=collection&_r=0
Deflation does seem to be helping the Japanese economy but like you said this tactic can come with some hidden problems. This way of boosting the economy may have definite positive effects on GDP but at what costs? There are a few ways that governments can fight deflation. One of these ways would be to have central banks buy treasury securities in the open market. This would end up increasing the money supply while also in effect encourage people to spend their money. Negative interest rates is another, although not very conventional way of fighting inflation. This basically is when the depositor has to pay instead of normally receiving money on their deposits. All in all deflation is not a good way to jump start an economy and there is a variety of ways to fix this problem.
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