The Impacts of Yen Deflation on Japan’s Economy

RIE Assignment:

The Impacts of Yen Deflation on Japan’s Economy

University of British Columbia

March 16, 2016

Despite repeated attempts to revitalize its economy, Japan remains in a mild but chronic deflation over past two decades. Japan’s Prime Minister Shinzo Abe’s economic expansionary plan has depreciated the yen massively since the end of 2012 (Lam, 2015), which was expected to have a positive impact on Japan’s trade balance. It seems that this outcome has favored exporters, as they possess higher price competitiveness in the global market leading to potential increase in export. However, it resulted in higher import prices laying more pressure on households and small businesses. To further elaborate on this contraction, this essay will work to examine the impacts of yen depreciation policy on Japan’s economy.

This expansionary policy has indeed made some improvements from the perspective of increasing stock prices. According to the research done by Samsung Economic Research Institute, it is observed that the Nikkei 225 index doubled its number after Abe's election, soaring to 15,000 in the first quarter of 2013. Moreover, stock prices for some giant electronic companies including Sony, Panasonic and Sharp ended up with numbers more than doubled in 2013 (Bon-Kwan, 2013). In terms of the exportation, as the yen has depreciated against US dollar from 78 JYP/USD in 2012 to 120 JYP/USD in 2015, Japanese exportation should generally rise as yen becomes cheaper in international market (Lam, 2015). This increasing export as well as the employment rate should fuel household consumption and public investment directly. As a result, a higher aggregate expenditure should in turn lead to an upward shift in aggregate demand while positive expectation of inflation should further prompt consumption and investment.

However, paradoxically, the opposite was happening in the Japan. Japan posted a trade deficit of 777.5 billion yen in February 2013, as exports decreased 2.9 percent from a year earlier and imports rose 11.9 percent (Hiromichi & Takashi, 2013). According to a research done by economists Hiromichi Shirakawa and Takashi Shiono, part of the reason is that some products, including certain electronic components and high-tech materials have a monopoly market structure in Japan. This means fluctuations in the value of the yen have limited impact on overseas demand.  Regardless of the value of yen, customers would buy them when they need. Another contributing reason is global economic downturn, especially China. Shipments to Chinese factories, the largest buyer of Japanese-made machinery, had sharply decreased 10.8 percent in the first two quarters in 2013 (Lam, 2015).