Macroeconomics Case Study

Price Levels in Japan: A Macroeconomic Conundrum

OR

Abstract: Not very often is a country’s macro-economic data is foxing, and still seldom is the case when the general cost of living escalates and the central bank is busy dealing with deflation. Authorities at Bank of Japan are at similar logger-heads. The official Consumer Price Index (CPI) indicates a decline, but consumers complain climbing expenses. The Bank acts by the CPI, not based on people’s perceptions, and so neglects consumer woes. Economists maintain that the lower income groups – with less than ¥2 million a year – will be the most affected, with increased cost of living. The case helps analyse if a central bank can depend merely on a set of standard indicators to guide monetary policy; or should the indicators be changed, based on the prevailing economic exigencies. The case also helps discuss if price level indices always reflect the actual cost of living.

Pedagogical Objectives:

• To discuss the methods of measuring inflation (WPI, CPI )
• To analyse the impact of the deflation and measures to contain deflationary pressure in an economy
• To understand the paradox of falling prices and rising cost of living in Japan.

Keywords : Bank of Japan, Japanese Price Levels, Inflation and Deflation, Consumer Price Index, Price Stability, Trend Inflation, GDP Deflator, Aggregate Price Index, Real and Nominal GDP, Cost of Living, Standard of Living, Statistically Measured Price Movements