Why does Japan want inflation if their Yen is already growing weaker?
In: Economics
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.
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