Japan and its Big Deflation Problem
With the United States ranking number 1 and China ranking number 2, Japan being the 3rd largest economy in the world has a gross domestic product of a mind blowing four trillion dollars per year. Japan is definitely a force to be reckoned with. This export based economy is home to some of the world’s most popular companies. Companies like Sony, Canon, Honda, Toyota and Sharp are world renowned and call the economic giant, Japan, home.
The Yen, which is the name of the currency used in Japan, has a reputation of being stable and safe. But even though Japan is the third largest economy on the planet, it is one of the few countries in the world that suffer from a major economic problem. That problem is called, deflation. Unfortunately, Japan isn’t a stranger to deflation for it has been experiencing deflation since the 1990’s.
If you don’t know what deflation is, it is when overall prices of goods and services decrease over time. It’s usually a side effect of a strong currency. In Japan’s case, having a strong currency is a very bad thing. Why? Because Japan is an export based economy, which means a lot of the country’s wealth comes from exporting their goods and services.
When a currency becomes too strong, that country’s goods and services will be more expensive to foreign countries. That’s why Japan must avoid a strong currency like a plague. Japan’s strong currency is also responsible for throwing the country into a deflationary spiral. Don’t forget, deflation is when the overall prices of goods and services decrease overtime and that is a bad thing as well. I know that it seems counter intuitive, but it’s true.
When overall prices for goods and services decrease over time, it also does harm to an economy for it gives an incentive for consumers to not spend money and an incentive for banks to not loan money. That can do some major harm to an economy.
The Bank of Japan, Japan’s central bank, has been doing all it can to get Japan out of deflation. But all their efforts seem to be ineffective. Experts at the Organization for Economic Co-operation believe Japan may be in deflation until 2014. Only time will tell.
Stephan Smith believes that one solution the Bank of Japan can implement is to print additional money. That will weaken their currency, stop deflation and help Japan in exporting more goods and services.
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