If there is one thing that consumers do not like, it is rising prices for goods and services. Many people find that their income fails to rise at the same rate as inflation and consequently their disposable incomes and standard of living decline. However, the government of Japan has been deliberately attempting to trigger inflation in the Japanese economy.
Japan has suffered from many years of deflation where prices fall over time. Whilst at first thought, this might sound like consumer paradise; it is a bad thing for the economy. People delay making significant purchases for as long as possible in the knowledge that the goods they want will be cheaper in the future. This trend subdues domestic demand which is a core element in any economy. Consequently, received wisdom from leading economists is that a low, but sustained level of inflation is healthy for an economy (but usually, they warn that wage inflation is a bad thing!). Most central bankers target an inflation level of between 2 and 3% and will tighten monetary policy to choke off inflation if the upper band is breached by raising interest rates.
Data released for consumer prices for February reveal that inflation is running at 1.3% after the ninth straight month of increase, but it is still significantly below the Bank of Japan target figure of 2%. Next month, a sales tax is due to be increased from 5 to 8% and it had been anticipated that this would spur consumer spending as people rush to beat the tax. In the event, consumer spending slowed last month, slipping by 2.5% over the previous month’s level.
Japanese unemployment is low in comparison with other major democratic economies, standing at 3.6% - its lowest level for six years.