Summarize the key message of an article called” Land of the Rising Price”:A burst of inflation has happened in Japan in 2008， which makes the price A broker named Christopher Wood points out that it is definitely But others don’t agree with the John Richards， who works in the Royal Bank of Scotland in Tokyo， claims that the recovery in Japan has depended on exports too However， the demand from Asia， America and Europe has slowed this The rising price causes to reduce companies’ profit margins， while customers’ purchasing power also Richard Jerram， who works in Macquarie Capital Securities in Tokyo， suggests that when the value of savings is changed by inflation， households are possible to transfer savings into other assets in order to get higher But M Wood argues that the bad inflation， which makes the various costs increase， is another type of That will cause rapid and deep change in Japan according to the He strongly believes that the rapid and deep change will happen However， that will not One of important reason is that the interest rate can’t be increased by the central bank as quickly as the bank would Another reason is that if money remains cheap， corporate reform is impossible to take So the inflation is not good news for JWhat cause deflation in Japan:Deflation is a process of falling price， which is the opposite of Price levels are highly connected with the relationship between the supply and the To understand and express the definition of deflation simply， there is assumption that we are on an isolated island and there are 10 same goods and ten $00 bills that are able to buy them If everyone wants to get one of them， it is obvious that each good costs $ However， if some people don’t want to get it， the price in each good will decrease because sellers want to sell all of So they have to decrease the price in order to encourage people who don’t want to buy any more buy the This is one of types of deflation， which is caused by decreasing the demand of (InflationD， ND)To express the theory more clearly， let’s see a diagram In this diagram， the horizon axis y represents total product (national income)， while the straight axis represents price AD represents aggregate demand curve， while AS represents aggregate supply When the aggregate demand curve drops from AD to AD’， the total product， which depends on the point of intersection between AD curve and AS curve， don’t increase， is still y’ But the price level decreases from P to P’ So this is deflation caused by decreasing the demand of But in the isolated island， if the quantity of money drops to $0， while the number of goods is 10， the price in each good will decreases to $ This is another type of deflation， which is caused by reducing the supply of By the way， the supply of money can also be dropped if someone holds half of money on the island and refuses to spend it on (InflationD， ND)According to the line chart in the article called” Land of the Rising Price”， it is clear that the consumer price fluctuated at very low level during the last ten That means the purchasing power is low， which is a sign of The situation in the last ten years is caused by decreasing the demand of goods or decreasing the supply of Is deflation good for an economy?In fact， whether deflation is good or not depends on the cause of the If deflation is caused by increasing the goods supply， it will be For example， in the late 19th century， with the industrial revolution happening， the productivity of goods was So the supply of goods obviously went Therefore， the price level Decreasing the goods demand or increasing the goods supply has the same If， however， deflation is caused by reducing money supply， it will be The economy contracted because of lack of People may lose their Thus， banks don’t loan money because people have no ability to pay off Therefore， money supply will fall again， while more people may lose their (InflationD， ND)BOJ’s monetary policyMonetary policy is generally classified as an expansionary policy and a contractionary A policy is referred to as contractionary if it decreases the supply of money or increases the interest An expansionary policy raises the supply of money， or drops the interest Obvious from the line chart in the article called” Land of the Rising Price”， the gross interest income dropped quickly from 1994 to In other words， the interest rate in the 12 years decreased That means BOJ’s monetary policy was an expansionary Therefore， the supply of money could be increased using this That would activate the aggregate (Wikipedia， the free encyclopedia， 2008)Though the policy was on the correct track， I don’t think BOJ was successful in solving the deflation One of important reason is that the time of reducing interest rate was more than 10 years， which was too That means BOJ did not find a suitable interest rate during the 12 Another important reason is that when a burst of inflation has happened in 2008， the aggregate demand is not activated The inflation relies on Japan imports mostly， rather than increasing domestic So the purpose of the policy has not achieved The third reason is that the interest rate can’t be increased by BOJ as quickly as BOJ would Bad overseas and domestic economic situation prevent from increasing the interest So generally， BOJ was not successful in solving the Interest rate， exports and exchange rateThe interest rate has very strong effect on the exchange As we all know， the interest rate level depends on the relationship between the demand and the supply in foreign exchange Foreign exchange is one type of financial An investor chooses and holds it because it brings capital Actually， the return of currency in each country is measured by the interest rate in each country’s financial If the interest rate of currency in one country rises， the return will also rise， attracting investors to buy the If the interest rate drops， the return will Therefore， the attraction of the currency is BOJ has kept the interest rate low， which is the lowest of any G8 That means the interest rate of Japanese Yen is lower than many other countries， which leads to increasing capital outflows， reducing capital Thus， investors who hold Japanese Yen will sell the currency， which will make the exchange rate Decreasing exchange rate of Japanese Yen always leads to rising Japanese exports and reducing the First， with the depreciation of Japanese Yen， price of domestic goods is lower than price of foreign So the demand of domestic goods will increase， while the demand of foreign goods will It is good for Japanese exports and international Second， with the increase of the demand of domestic goods， the price level will go up， while the employment will rise， increasing the national The behavior of companies and consumersIn deflation period， the price in the market is As a result， the company profits are So a company is trying its best to make the cost of production lower in order to remain One way to achieve the aim is to reduce the nominal Therefore， people spend less money in purchasing so that they will show the sign of belt- Actually， the deflation lasted for more than 10 So when the inflation is happening， the price level is Therefore， companies expected that the increased price level might solve the problem caused by So they have struggled to pay more wages and hire more workers so that the cost is But unfortunately， rising price level don’t solve the Therefore， company profits are decreasing because the cost is increasing in the inflation In fact， in the short run， even though inflation is happening， people are not responding to that because they don’t know the price in future will be higher than current price， at least in the short
