Macroeconomics Commentary - Japans consumer prices fall on weak domestic demand Essay Example for Free

Macroeconomics Commentary lacquers consumer sets crepuscule on weak domestic make EssayJapans consumer prices follow on weak domestic studyJapans consumer prices necessitate fallen for the first cartridge holder in four months, as weak domestic get hold of and deflation continue to weigh on growth.Core consumer prices, which exclude fresh food, slipped 0.1% in October, the statistics bureau said.One of the reasons for the fall is depart years cig artte tax rise falling out of the calculations.The watertight yen as well as Europes debt crisis are hurting the growth outlook for the worlds third-largest parsimony. Yen strengthIn March, Japan was hit by a devastating earthquake and tsunami that caused much damage in the north-east of the country.The political relation this week passed an emergency budget of $155bn (100bn) to try to boost domestic demand, however the effects wont be felt for a few months.The data underscores the sluggishness of domestic demand, as the ec onomys recovery has taken a breather because of a delay in reconstruction efforts and global economic slowdown, said Takeshi Minami from Norinchukin Research.Japans economy bounced confirm from ecological niche, triggered by the earthquake and tsunami, in the three months to September.However, the pace is expected to slow because of the pressure on exporters from the strong yen, as well as the bleak global outlook of growth.Oil pricesThe slowing global economy has caused a decline in crude oil costs. That combined with the yens handgrip have made sinew imports to Japan very cheap.Gasoline prices at the pumps have dropped 1% since September in Japan.The yen has mod 6% against the one dollar bill in the last six months.Some analysts said consumer prices in Japan could and decline as the slowing global economy continues to weigh on the price of oil.Deflation is a long-lasting fall in the average price train of prices in the economy. Japan experienced deflation where average le vel of price fell by 0.1%. The type of deflation in Japan is known as negative deflation which resulted from demand side of economy. A fall in domestic demand caused a decrease in consumer prices level and a decrease in real produce.The fall in domestic demand was due to last years cigarette tax rise. Government rose cigarette tax to increased presidency r regular(a)ue. queer tax charged on producers instead of consumers. Tax increased the costs of production to producers. This shifted the supply wind up form S1 to S2 while the demand curve did non change. Cigarette tax depressed the activity of foodstuff and placed a wedge. Producers gained less profit and consumers pay more. Hence the total sum decreased from Q1 to Q2, as figure shown below.Tax charged on producersequilibrium without procession taxThe increases in price that consumers paid reduced the willingness to buy. The demand curve shifted to left from D to D1 as figure shown below. Hence the quantity demanded redu ced from Q2 to Q3 and price of cigarette reduced from P2 to P4.Tax affects demand indirectlyLess quantity demanded of cigarette room less quantity sold at the price lower than without tax. Therefore even lower government revenue collected. What have discussed above would repeat itself as a cycle if Japan government continues to rising cigarette tax.The results of higher cigarette tax combined with several other factors together to reduce the marrow demand in Japan market. The economy was near full employment level of output, with a broken amount of spare capacity. The figure below indicated that as aggregate demand curve shifted to left, the quantity of output and average price level reduced.Demand-pull deflationThe biggest problem associated with deflation is unemployment. If aggregate demand is low, business is likely to lay score workers. In fact, Japan already had unemployment pass judgment around 4.7%. High unemployment rate linked with high suicide rate and other securit y uncertainties. Government tried to correct deflation and to reduce rate of unemployment by heart and soul of pass an emergency budget of $155 billion to boost domestic demand. However, the aim will not be fulfilled in short-run.Japan is a developed country. There are periods of rising growth, followed by periods of slowing growth, and falling growth in developed countries. This is known as business cycle which is the semestral fluctuations in economic activity measured by changes in real GDP. The phases of business cycle are boom, recession, trough and recovery. Recession is two consecutive quarters of negative GDP growth. During a recession, consumption and coronation fall. Falling aggregate demand assumes to unemployment. If more people are unemployed, there will be even less consumption and deflation.At some point the recession came to an end. Output cannot continue to fall as there would be some people with jobs to maintain consumption, foreigners demand exporters and gove rnment spending. Japans economy bounced back from recession and started to recovery, triggered by earthquake, from June to September. The real GDP started to increase as government running budget for reconstruction and medical checkup treatments after earthquake. However, the pace of recovery tends to be very slow as a result of the appreciation of yen.The yen has appreciated 6% against dollar in the last six months. Appreciation of yen against dollar mode the purchasing power of yen has risen. However, appreciation of yen against dollar occurs at the same time as the depreciation of dollar. An commuting rate is value of one currency expressed in name of another currency. One of the disadvantages of a high exchange rate is damage to export industries. If value of exchange rate is high, then export industries find it is difficult to sell products because foreigners are likely to reduce the quantity imported since goods become more expensive. Therefore, lower the revenue from expo rts, slower the pace of recovery.The fell of average price level (deflation) can also be explained by the high exchange rate. When value of exchange rate is high, price of imports will be relatively low. Taken import of oil as an example, the gasoline prices have dropped 1% since September. In addition, price of imported raw materials will reduce the costs of production for firms which could lead to lower prices for consumers. Low price of imported goods also puts pressure on domestic producers to be warring by keeping prices low.Japans government could lower the value of yen by means of buy foreign currencies on foreign exchange markets. Government uses its own yen to buy thereof increases supply of yen on foreign exchange market and so lowers its exchange rate. Lower the level of domestic interest rates could lower the value of yen too. This will cause financial investment funds abroad more attractive. In order to invest abroad, investors will buy foreign currency therefore exc hanging their own currency and increasing supply of it on financial exchange market. This could lower its exchange rate.