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Monday, Jan. 10, 2011
Overcoming deflation psychology
One reason people feel that the Japanese economy is stagnant is the long bout of deflation. Once deflation psychology has set in, it is very difficult for both firms and people to shed it.
With such psychology, firms fear raising the prices of their products and services, so they concentrate instead on reducing costs, which often results in cutting wages and eliminating jobs. Consumers tighten their purse strings to save money, losing confidence in future prospects. The overall effect of this behavior by firms and people dampens investment and consumption, aggravating the economic downturn.
The Kan administration expects the consumer price index to level off, on average, in 2011, thus ending the negative price rises for three consecutive years. It expects that, halfway through 2011, the monthly consumer price index will start showing a rise from the same month in 2010. The government and the Bank of Japan should adopt timely measures to stimulate economic activities.
Firms that have reduced the employment of full-time workers and instead employed a large number of irregular workers such as dispatched workers to increase their profits should rethink their policy. Such an approach not only weakens the organizational strength of firms but also reduces the total wages of the nation's workers, thus leading to a shrinking economy as a whole.
Firms should be able to pass rising personnel costs on to the customers who buy their products and services. Then they could employ more full-time workers and raise the wages of irregular workers. They would also hire more women and elderly people.
The government should pay close attention to the rapid graying of the population. As the number of retired workers increases, the total wages of the nation's workers will shrink. Elderly people usually do not spend as much money on consumer purchases as younger generations do. At the same time, there are quite a few rich elderly people. The government should consider crafting a tax system that encourages transfers of wealth from such people to younger people who consume more.