Japans situation on the eve of deflationary pressure
How do we define deflation ?1. What is not inflation. (relative measure)2. When value of something is less than what it should be.3. Means , inflation falls below 0% .4. When lesser money can buy more.
EXAMPLEInitially if 5 quantities of a product could have beenbought for Rs. 100 , after 10% deflation (Rs.20*90/100) = 18 is the new price , same 5 quantitiescan be bought ,with still Rs. 10 to spare.
Here we are to observe the most remarkablecase of deflation in the recent history , with the most uninteresting title.
Scenario ?: On the brink of deflatory breakdown .
• 2nd largest economy of the world.• Managed rather than marketable economy .• Means govt. had a big role.• Based on dualism , coexistence of big , medium/small companies , latter usually being sub contractors.• Strong social responsibility .• Main bank system - one bank for a group of companies.• Easy credit from banks.• Rarely questioned companies credit ability.• Most funds of banks , went into credit creation of companies.• Circulatory deterioration of financial standing of both.• Banks did not secure credit properly ( phenomena of moral hazards) .• Still statutory objective of bank was to – maintain price stability and support governments economic policy. (Extreme contradiction)
BOJ couldn’t make monetary policy. Sudden turn about of policies Falling discount was the reason rates. of deflation. Reversal ofmonetary policy Credit was cheap was delayed and loans readily , interest rate available and increased to utilized. 4.25% only in 1989. Not because of Increase in fundamental speculative factors but lose prices of stocks monetary policy. and real estate.
IT ERUPTED IN 1989-1990 Sudden turnabout in The discount rate Japanese monetary From that (int. rate charged to policy of 1989 was an eligible bank to the main reason why moment, theborrow funds directly rates of inflation the speculative from the central bubbles on the were lower andbank) was decreased Japanese stock lower andfrom 5.5 % in 1982 to exchange and eventually5% in 1983, and then housing market burst to 3.5% in 1986 and starting deflationary deflation finally to 2.5% one appeared. processes in the year later . economy.