Tuesday, November 17, 2015

Why Has Japan Been Unable To Increase Inflation?

This article explains why inflation would be good for Japan but that it has been unable to hit its 2% inflation target.  The Japanese central bank has done more than the Fed in the use of monetary policy to increase the inflation rate without success.  Japan has also been successful in reducing the unemployment rate.  Standard economic theory suggests that there is a link between the unemployment rate and inflation rate.  A low unemployment rate should cause wages to rise and accelerate demand.  Higher costs for firms and an increase in demand for products is typically associated with rising prices.  Standard economic theory can't explain the low inflation rate in Japan, and other theories are described which might increase inflation, but they are somewhat radical and have not been tried.  Macroeconomic theory falls apart if it cannot explain Japan's inability to increase its inflation rate.

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