Japan: Betting on Inflation? Case Solution & Answer



Japan has been under dark clouds of deflation since the late 1990s. Many of the central banks put the blame of this economics issue on poor monetary easing. As seen from the case,that after the collapse of the bubble, real estate prices declines yearly. Many economic observers have identified the main Japanese problem to “Deflation of assets”. The deflation was further contributed by the 2008 financial crisis when Lehmann brothers got bankrupted. This led Bank of Japan to lower down their interest rates, with this; they were paying 10basis points on an excess reserves deposited by banks at the central Bank of Japan.

Inflation rate was on a downside yet again after Lehmann brothers decline. It is said that the governor of BOJfrom 2008-13 period was totally out of clue regarding the deflation issue. According to him, the problem was beyond his control. He also believed that to provide the stability to the economy, deregulation would be needed which will ensure the growth potential and this might be one of the solution of deflation. On one occasion, the governor also said that the growing age problem might be another cause of deflation. This was backed by the reason that older consumers are not extravagant and they do not waste their money, other than this, he said that younger generation is still skeptical about economy growth.

Hence, it’sclear that when Abe took office, he had to deal with this most prominent issue. He wanted changes in monetary policy and asked the central bank head to buy the newly issued bonds directly from the government rather than going to the open market. After the strong orders from the PM, both the government and the central bank issued the joint statement in the favor to abolish deflation through strong policy coordination. Now they had also set themselves a target to stable the price by 2% year on year rate of change of CPI. Also, the newly elected government’s inflation rate target was 3%.

Before taking the office, Abe had precisely indicated that his government would target deflation rates and it’s their top priority. To stay with his goals, he wanted a governor of central bank; someone who could understand his thinking regarding the economic problems. Someone who shares Abe’s viewpoint and perspective, hence for the same reason Abe brought in Haruhiko Kuroda as the new governor of Bank of Japan. Kuroda also showed his strong will to take care of deflation and wanted to do this by closing the gap between; what an economy can produce and what it actually produces also called output gap. He thought that by doing so they would be able to increase the prices……………..

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