Deflation, Japan...

Japan has been facing deflation since a long time now even after with so much of fiscal and monetary easing... The policy makers think that inflation, as a sign of economic-activity, is must for increasing the growth rate of the economy... But, this is not happening... Inflation materializes when demand outpaces supply and then all the prices increase in the same direction... even the interest-rates and wages that decide demand and supply, and, inflation and unemployment in the economy... And deflation occurs when supply outstrip demand... Since Japan uses core-CPI as an index for inflation we need to view the problem from that standpoint... Generally, core-inflation is the inflation in the manufactured-goods-segment, excluding food and fuel... and CPI is the consumer-price or retail index and when we add them together it becomes core-CPI which is the retail-price of manufactured goods, excluding food and fuel... But Japan’s core-CPI excludes food and not fuel... It uses core-CPI with fuel... Prices, normally, increase when food and fuel prices go up, which are important for price-control, but Japan is a developed-economy and food-prices are generally not a problem therefore it uses core-CPI with fuel... Core-CPI shows inflation in manufactured-products which largely depends upon interest rate and wages costs... The reasons for low core-CPI is the low interest-rate in the economy for decades and is even after full-employment in the economy wages has been relatively stable even after increase in productivity... Therefore, when the cost of manufactured-products is not increasing, including fuel, then how inflation will ensue... The economy will face low inflation... When wages are not increasing how demand and inflation will go up... The economy has, actually cut down on nominal and real wages... Japan in an attempt to make its economy competitive for exports has even hit in its foot itself... Japan, like the US has kept wages low even after increase in productivity of the masses... Japanese core-CPI, including fuel, after consumption-tax shows lower inflation because of low demand which means Japan’s tendency to invoke core-CPI, including fuel, has not lost completely... If the Japanese economy tries to increase nominal and real-wages according to the productivity, it might be able to stoke core-CPI in the future...