The document discusses deflation and provides examples. Some key points: 1. Deflation is when the value of something is less than what it should be, meaning inflation falls below 0%. This can allow you to buy more with less money. 2. An example is given where initial prices fall 10%, allowing you to buy the same amount for less. 3. The document then discusses a case of significant deflation in Japan in the late 1980s and early 1990s. Loose monetary policy and a speculative bubble contributed to this deflation.

1. 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.

2. EXAMPLE
Initially if 5 quantities of a product could have been
bought for Rs. 100 , after 10% deflation (Rs.
20*90/100) = 18 is the new price , same 5 quantities
can be bought ,with still Rs. 10 to spare.

3. Here we are to observe the most remarkable
case of deflation in the recent history , with the
most uninteresting title.

4. Scenario ?: On the brink of
deflatory breakdown .

5. • 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)

7. BOJ couldn’t
make monetary
policy.
Sudden turn
about of policies Falling discount
was the reason rates.
of deflation.
Reversal of
monetary 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.

8. 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, the
borrow funds directly rates of inflation
the speculative
from the central
bubbles on the were lower and
bank) was decreased
Japanese stock lower and
from 5.5 % in 1982 to
exchange and eventually
5% 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.