Analysis Of Mild And Sustained Deflation In Japan

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Register to read the introduction… Looking at an article from Kaoru Hosono titled ”Mild and Sustained Deflation in Japan”, there are a few hypothesis that he looks into to try to explain what the reason for the deflationary period in Japan means and why it continues to be an issue. These issues, such as incorrectly utilizing the tools of monetary policy, shocks in prices, Liquidity traps and deflationary traps can all be acceptable ways of thinking of the root of the problem, but I will be mainly focusing on the liquidity trap. Japans GDP has been decreasing since 1995 at a rather alarming rate of 2 percent a year (Svensson 2005). With this dropping GDP and a continued state of stagflation in Japan keeps them in this state of …show more content…
This was the time of the great depression, and that set up the perfect conditions for a liquidity trap. This period was set in motion by a shock. The stock market was booming and then it happened, it bust. Even after the hardest times of the depression, the wake of the storm was a stagnant economy. This lead to a liquidity trap. In the 30’s, monetary policy was actively used to help initiate an expansionary policy, but the economy was not responding to this. The monetary policy was not affecting the shot term interest rate because quite frankly it has reached it limits and raising the interest rates was clearly out of its reach. This can be observed in the graph on the right, found in Athanasios Orphanides’ paper “Monetary Policy in Deflation: The Liquidity Trap in History and Practice”. It had been thought that perhaps the central banks were unwilling to adopt a fitting policy and that may have been the cause of the trap. Data shows that even though it may have not been as consistent and persistent as if could have been, actions were taken to try and expand the economy. Although not confirmed, these actions in monetary policy may very well be the small spikes in the interest rate between 1932, and 1938. If this is not the case and the Bank didn’t make persistent efforts, then that can be looked at as a fault that the central bank may have made. If they would have

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