Why does Japan want inflation if their Yen is already growing weaker?
In: Economics
I don’t know all the ins and outs, but inflation means that the cost of goods is going up. Part of the result is that companies make more money and wages have room to go up.
Wages in Japan have been pretty stagnant for a long ton time. And even with incredibly low interest rates, consumer demand and inflation have not gone up.
Inflation is different from a currency’s strength against other currencies. Inflation is a change in the buying power of the currency – particularly, the buying power for goods or services within that country.
This is an important different because even taking into account other currencies different areas can have very different costs. An American visiting Vietnam, for example, could buy a very good dinner for just over $8 American dollars. That doesn’t mean the dinner is on par with what $8 would buy in American (not much more than a couple items at a fast food restaurant), but rather that the cost of living in Vietnam is simply much cheaper than America.
For Japan, their currency is weakening compared to the American dollar, but that’s not related to wanting inflation in costs within their country. The reasons for wanting inflation are relatively complex but largely has to do with encouraging people to spend money – an country’s economy only exists because people spend money, and if the economy slows too much then you can run into a depression where no one has a job and because no one has a job businesses don’t have any customers, and because businesses don’t have any customers no one has a job.
Japan’s economy has been stagnating for a very long time, and teetering on the line of potentially falling into a depression if it slows much more than it has. They want to create inflation to try to prevent that from happening.
Inflation has a bad rap at the moment, but all advanced economies actually want a little inflation. About 2% per year is the ideal amount.
This is because *inflation drives spending and investment.*
If there was no inflation at all, people could just leave their money in the bank, and it could remain there forever happily. This would be bad though. For an economy to work, money needs to be spent, or invested. It has to change hands. Money that just sits in a bank doing nothing is of little use the economy.
Banks do pay interest on money of course, but that interest is almost always below inflation. So money in the bank is *always going down in value.*
This constant erosion of the value of money then influences spending habits. If people know their money is devaluing while sitting in the bank, they are more likely to invest in the market, which is great for building the economy. It also encourages people to spend their money on the things they want, rather than just sit on it. And more spending means more goods and services being produced, and more taxes raised for the government, which are good things for everyone.
One of the worst things that can happen to an economy is *deflation*. This is when prices go down, rather than up, and money is gaining value rather than losing it. This encourages people to not spend their money, and hoard it instead. Because after all – if you think something will be cheaper next month, you’ll probably wait to buy it, and this leads to the economy drying up and stagnating as less and less things get purchased.
Inflation means your money will buy you fewer goods tomorrow than it will today. Deflation is the opposite. Your money will buy you more in the future.
So imagine you have several sizable but delay-able purchases you need to make. Maybe a new car, new washing machine, etc.
Under an inflationary scenario, you want to make those purchases today while your money is worth more. If the value of your money stagnates or even declines, then you’re not as interested in making those purchases immediately.
Central banks usually target a healthy level of inflation to keep the economy active and keep people buying goods and services rather than stashing their cash and waiting for the future.
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