Update on Japan’s macroeconomy

It is exactly a year since the consumption tax was raised from 5% to 8%, possibly raising prices—though not enough to cause sustained cost-push inflation. Actually Japan is still encountering deflationary tendencies, which make firms less willing to expand and invest because profit margins are depressed. The one definite effect of the rise in the consumption tax is that it dented confidence and shifted aggregate demand (AD) left by more than expected. Due to the negative effect on economic growth, government is still undecided as to whether or not to risk a further rise in the consumption tax to 10%, although they do want to reduce the size of the budget deficit.

However, AD has been boosted by the depreciation of the yen which has increased not only tangible exports (trade in goods), but also “invisible” exports (trade in services) most notably through the influx of foreign tourists. Many are visiting Japan at the moment, attracted by the cherry blossoms and the reduced prices (in terms of dollars, yuan etc) of travel in Japan.

For more (and some pictures of cherry blossoms) see http://www.bbc.com/news/business-32141417

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