Japan Deflation

Summary

The article, written by Ben McLannahan (2012) for CNN Business, talks about the measures taken by Japan for the month of April 2012 in order to stimulate the economy, which is currently experiencing a prolonged deflation or contraction. (Ito, 2006) It focuses on the quantitative easing strategy, a method that was used and popularized by Japan during the 1990s, to get the economy back on track by adding $61B dollars to this program. It is the Japanese politicians and their central bank (Bank of Japan) that are contemplating, with growing tension, the proper procedure to improve the shrinking economy. The former warns that if the actions taken by the central bank aren't as aggressive as they should be, independence will be removed from the institution.

Despite the seemingly aggressive move of the central bank, analysts are still criticizing the institution stating that their methods are insufficient. According to statistics, production from February to March did not reach the target and garnered only a 1% increase even though an addition of Y10tn was introduced to the asset purchase plan. Furthermore, manufacturers plan to cut production by 4.1% by May. This can be accounted for by the growing caution from the crises abroad, leading the country to rely chiefly on domestic demand. However, their Consumer Price is quite positive, rising by 0.5% year-on-year. Core CPI, nonetheless, decreased by 1% in April last year, which is .10% worse than the month aforehand. It was reported that the yen (Japanese currency) is 0.4% weaker versus the American Dollar and their stock market average (Nikkei 225) is up 0.3 percent. (McLannachan, 2012)

Main Concepts

Aggregate Demand

Given the formula:

AD = C + I + G + X – M

Aggregate Demand is the quantity representing the summation of expenditures: consumption C, investments I, government purchases G, and net exports X – M. It (the quantity of real GDP demanded (Y)) is the total amount of final goods and services produced in a nation that people, businesses, governments, and foreigners plan to buy. (Douglas McTaggart, 2007)

Deflation and the CPI

Deflation, as defined by Bernanke (2002), is the unceasing rise (consecutive periods) in the value of money and decrease in price of goods. The decrease in price does not pertain to one good, but must comprise of general goods as measured by the CPI or the Consumer Price Index. A basket of goods is chosen to represent the consumption of an average consumer. The increase or decrease in price is determined by use of a base year set by statisticians and economists concerned.

The dips and rises in CPI are caused by a shift in