After escaped from six years of deflation (line 9), the rate of inflation in Japan is 0.25%. However, the inflation rate of Japan is only two to three percent annually. It could be categorized as low compared with the other developed country such as Australia.
In addition, Japan faced a problem of sluggish in consumer spending. This is cause by demographic condition in Japan (line 27). To increase an inflation rate, the government has to find a way to increase the level of aggregate demand for local product, It could be done by applying demand-pull inflation . To increase the consumer spending and inflation rate, demand-pull inflation has to be chosen. If cost-push inflation is applied, it will worsen the problem of sluggishness in domestic goods demand as the price of goods rises.
Japan should adopt discretionary fiscal policy to increase Aggregate Demand (AD) for domestic goods. Lowering tax for domestic goods will encourage Japanese citizen to spend more; hence AD in Japan will increase to achieve higher level of inflation.
Figure 1 : "The Relationship Between Inflation and Unemployment"
Referring to figure 1, as the inflation rate successfully increased it will followed by decrease in unemployment rate as the demand for workers increase.
In 2004, Japan still maintains its rank as No.1 of Human Development Index in the world for life expectancy at birth . Japanese government should find a way to increase the growth of population, otherwise the ageing population will cause decrease in productivity. This is because ageing people tend to be less productive and consumptive compare to productive age (between sixteen to fifty five years old). To encourage the population growth, the government should give awards for every citizen who gives birth and scholarship for elementary school children. However, in the short term, this incentive has potential weaknesses. Firstly, government has to give extra expenditure to pay for this incentive....
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