Exports are now falling, previously one of the few bright areas for Japan, and now a serious situation faces the country.
One problem is that the Japanese people just don't want to spend and domestic demand is weak. This is encouraged by the falling price level (deflation), why should you buy goods today when in a few months they will be cheaper? The mentality of the population needs to be changed to help boost Aggregate Demand.
What does not work is lowering interest rates, they have tried that and actually had years of negative real interest rates. There have also been fiscal stimulus packages that have seen tax cuts and more government spending, things would have been even worse had they not done this but the problems continue. So what can they do?
One suggestion is that the Bank of Japan raise its inflation target from 1% to 2%. One reason why the Bank of England has a target of 2% is to prevent any chance of a slide into deflation. This seems sensible, but all a bit late now.
The next alternative is massive Quantitative Easing (QE). Print Yen and pump them into the economy. Here they will rely on households and firms having very high money balances as a result and so they will want to spend the cash to re-balance their portfolios. (The resulting fall in yields - already very low - has already failed to work).
Of course Japan also requires Europe to sort itself out so they can start buying Japanese exports again. But when you here people telling you that QE has gone too far and will be inflationary you must point of that this is exactly what is needed - higher demand and stable inflation - not deflation.
I think not only Japan but most countries in Europe are suffering a feeble situation of their economy due to the low demand of goods and services in domestic market. In Japan after the earthquake happened last year the political situation becomes ambiguous. Therefore the policymakers are confused at the moment, whether they should push up the price of the goods. After the earthquake last year, people have lost their homes and family. They need to rebuild their homes as their first priority. The government has to rebuild the infrastructure of the country as their first priority as well. Therefore I think it’s not a good idea to boost the inflation in short term, other than that I think a sustained increase inflation is better. I don’t agree the Japan government should issue QE. Basically, if they print out more money and they didn’t increase the output or other countries don’t consume that much. It will result in depreciate of that currency.
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