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Use tables or graphs to illustrate the price stability performance of Japan.

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Use tables or graphs to illustrate the price stability performance of Japan. Introduction: Japan's economic slump, which began with a stock market crash in 1989, now lies in its fourth recession in ten years. The Asian banking and financial crisis has had a profound effect on this, the second largest economy in the world. Japanese under performing banks are carrying Yen150 trillion ($1.3 trillion) of bad loans. State-run corporations are dragging productivity down, unemployment is rising and Japanese consumer' confidence remains low. Macroeconomic policy is proving highly unstable as Japan's 'illness' - that of deflation - remains predominant. Price stability is defined as the sustained absence of both inflation and deflation. (Mc Aleese: p.294, 2001). Further economic agents can make decisions regarding economic activity without being concerned about the fluctuation of the general price level. Along with effective fiscal policy, the control of government spending, low unemployment levels, controlled interest rates and hence inflation rates, macroeconomic policy is maintained. The most serious aspect of Japan's economic sickness is deflation. Japan's paralysis, where ineffective control measures have had many negative results, will now be discussed. Price Stability: Price stability, or rather instability in Japan's case, is characterised by the prolonged presence of deflation. The stock market is hovering around a 19 year low. The Nikkei 225, the most commonly used Share Price Index, had stood at 14 times the Dow through the 1980's. However in February 2002 it dropped below the Dow Jones Industrial for the first time since 1957. Japan's persistent decline in the general price level is again indicated by the Consumer Price Index. Prices have shown a 1% fall per annum. These falling price levels have increased real debt burdens. National debt stands at over 130% of GDP (www.economist.com). Also Japan's banks are chronically weak and burdened by duff loans of Yen37 trillion, about 7% of GDP. So Japanese banks have been left carrying excess bad loans, forcing them to cut lending. ...read more.


Both the levels of inflation for consumer and food prices have also fallen dramatically during this period. Japan 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Inflation, consumer prices (annual %) 3 3 2 1 1 -0 0 2 1 -0 -1 -1 Inflation, food prices (annual %) 4 5 0 2 1 -1 -0 2 1 -0 -2 .. Inflation, GDP deflator (annual %) 2 3 2 1 0 -0 -1 0 -0 -1 -1 -1 Source: World Development Indicators database The collapse of the Japanese stock market in the early 1990's also was of major impact to levels of inflation. From 1990 to 1992 Japanese stock prices decreased by half. Following this, prices of land and real estate also declined. By 1997 commercial land prices were at only 55% of their 1990 value. (Blanchard: p.143, 1999). This collapse in stock and land prices also had a major effect on Japanese banks. Many of the banks had loaned money to buyers of stocks or real estate. And so, when these prices collapsed, borrowers could not repay their loans. Bad loans on the balance sheets of twenty of the largest banks in Japan added up to 4% of Japan's GDP for 1997. (Blanchard: p.143, 1999). Economic Growth: Economists use many different methods to measure economic growth. The most common way to measure the economy is real gross domestic product, or real GDP. Essentially, Gross Domestic Product includes production within national borders regardless of whether the labour and property inputs are domestically or foreign owned. In contrast, gross national product is the output of labour and property of a country regardless of the location of the labour and property. Gross National Product includes income earned by the factors of production (assets and labour) owned by a country's residents but excludes income produced within the country's borders by factors of production owned by non-residents. It is summed up by the equation: GDP = C + I + G + X - M. ...read more.


The reason is that using monetary policy to stop deflation at this point in Japan is very difficult. The business sector is still in the process of improving their balance sheets and this remains their top priority. Households are still uncertain about the future and continue to be prudent toward buying. Given this exceptionally chilly demand climate, the Bank of Japan has not been able to stimulate economic activity even after buying government bonds and greatly expanding the amount of base money in the economy. Obviously, it will take a lot longer period of time to raise inflation given the current situation. In the long run, there is no other solution to Japan's structural problems, of which deflation is one large factor, than to speedily carry out structural reforms. The role of the Bank of Japan is to minimize the side effects of financial deregulation in the reform process and act as a break on deflation where possible. Incidentally, the Economist has advocated a large depreciation of the yen as a way to escape deflation, however, the fact is the historically high dollar is in a downward adjustment phase, and countries in Asia are falling into recession as a result of decreased exports. This is the current reality, so inducing a lower yen could prove difficult. In the long-term, the potential for inflation in Japan is high anyway, given its massive public debt and fiscal deficit. If the results of structural reform are positive, there is a good chance the economy will recover and deflation will be reversed. In the case structural reform doesn't advance, government debt will rise further and fiscal discipline in the market will come apart. In either scenario, inflationary pressures will rise. So, at this stage the effectiveness of infusing and inflation targeting should be studied further. 1 Germany has been experiencing a fall in the general price level of goods but a healthy services sector has meant that they have thus far avoided deflation. 2 There are three main bias in constructing this index, namely composition bias, quality bias and substitution bias ...read more.

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