Deflation refers to the fall in price level. It can be defined as the negative inflation rate. During deflation, the value of money increase instead of decreasing. Although deflation is not bad, long periods of deflation or low inflation led to economic stagnation and high employment rates. Deflation discourages spending as people expect things to cheaper in the long run. During this period, there is an increase in the burden of real debts, and this decreases the spending power of consumers and firms. During the 20th century, deflation durations were rare since western countries experienced inflation. However, the United Kingdom experience deflation in the 1920s and 1930s and the country faced economic depression ( Fleckenstein, Longstaff & Lustig, 2017) . The potential benefits of deflation include lower production costs and increased efficiency. It also enhances global competitiveness, since when one country faces deflation, another one would have inflation, and this would make such a nation to be globally competitive, increasing exportation. For instance, Japan’s deflation rate resulted in higher level of exportation, and this offset the decrease in consumer spending.
Deflation is caused by several factors such as an increase in money value to reduce prices, shortage in circulation of money that makes people hold onto their money rather than spending it, higher supply of good than demand, making companies decrease their prices to attract consumers, and a decrease in demand of commodities and this reduces spending. Several characteristics of deflation are seen in the United States today. For instance, productivity has reduced, and this had led to a lack of hiring from 2001. Unemployment rates dropped to 6.1% in 2003, and at least 57,000 jobs were established for the initial gain in the first eight months ( Hudson, 2015) . More than one million job positions have been eliminated since 2001. Further, some assets, especially housing have been overpriced, and the U.S deficit in trade has been increasing and hit $41.8 billion in 2003.
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Japan can use monetary policy tools to overcome deflation. The government can lower the limits for bank reserve. When the reserve limits are eliminated, the banks can generate as much credit as they need to create an incentive for new loans for consumption and investment. The country can also open market operations. This means that the central bank can buy treasury securities in the open market and provide newly created funds to the seller. This would increase the money supply and encourage people to spend more money ( The Economist, 2011) . Deflation can be eliminated by decreasing the target interest levels on short-term money lent to the financial sector. If the rate is set at a high point, it will help the financial sector to borrow more funds required to meet the daily obligations and operations (Misawa, 2018). With an activated economy, INA Food will increase their production, offer more employment opportunities, and invest in infrastructure or production units.
Tsukakoshi raised its prices during deflation periods to reduce the demand for their goods. Lowering their prices would have led to more consumers purchasing their commodities, and this would require them to increase production. However, the cost of production would be higher than the profits obtained, and this could lead to bankruptcy. In essence, deflation improved the purchasing power of the customers due to a decrease in prices ( The Economist, 2015) . This enables the consumers to save more money, and their incomes increase relative to the expenses. In the long run, the low prices affect the companies since they are forced to decrease their wages, and might be forced to lay off some workers. This led to declined incomes and decrease in consumer sliding.
Countries such as Japan have faced deflation since the late 1990s. During these periods, the state faces an increase in real debt burden, restricts monetary policies and reduced wages due to difficulty in adjusting prices. On the other hand, deflation has benefits such as increased efficiency and low production costs. For Japan to overcome deflation, it should focus on implementing long-term monetary strategies.
References
Fleckenstein, M., Longstaff, F. A., & Lustig, H. (2017). Deflation risk. The Review of Financial Studies , 30 (8), 2719-2760.
Hudson, M. (2015). Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy . CounterPunch.
Misawa, M. (2018). INA Food insutry (2): Marketing strategies in deflationary environment. Asia Case Research Centre. 1-13.
The Economist. (2011). An old problem; Ending deflation in Japan. Economist Intelligence Unit. Retrieved from http://store.eiu.com/
The Economist. (2015). The high cost of falling prices; Deflation. Economist Intelligence Unit. Retrieved from http://store.eiu.com/
