Monetary Policy Case Study

Price Levels in Japan: A Macroeconomic Conundrum

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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. Aauthorities 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 how changes in the general price level of an economy are tracked
• To examine how well price-level indicators - like the CPI - reflect the living costs.

Keywords : Bank of Japan, Japanese Price Levels, Inflation and Deflation, Macroeconomics Case Studies, 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