Why Very Low Inflation Can Damage Economies, Essay Example

An online article on USA Today reports that Bank of Japan is seriously concerned about very low inflation and has, thus, injected more stimulus into the financial system by purchasing government bonds and other assets. The government hopes that this move will encourage consumers to spend more (The Associated Press).

The government’s move makes sense because purchase of bonds and other assets increase the money supply in the economy which, in turn, helps bring down interest rates. This means the cost of borrowing is cheaper and, thus, may encourage consumers to borrow more to fund their consumption activities. Bank of Japan’s concerns about inflation are also justified because consumers’ behaviors are shaped by their expectations of the future. Right now the inflation rate in Japan even fells below 1 percent. As a result, consumers may postpone their purchase activities in the present as they expect prices to be more attractive in the future. By helping increase inflation rate, the government hopes to create incentive for consumers to spend now due to fear of higher inflation in the future.

The article also provides other rationale as to why low inflation is harmful to the economy and they make sense. For example, wage increases are also influenced by inflation rate and low inflation rate also lead to lack of increases in wages. This, in turn, discourages higher spending. The values of assets are also negatively affected and there is limited capital appreciation. In addition, low inflation rate doesn’t only discourage consumers but also businesses from investing activities due to weak demand forecasts.It is clear that just as high inflation rate is worrisome, very low inflation rate is also bad for the national economy.

Work Cited

The Associated Press. Why very low inflation can damage economies. 1 November 2014. <http://www.usatoday.com/story/money/business/2014/11/01/why-excessively-low-inflation-can-damage-economies/18317177/>.