Ib Economic Hl Commentary

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. Furthermore, in the long-term this will benefit Japanese government, as the population increase productivity of Japan is expected to increase.

The production in Japan rise 8.6% over the year. At the same time unemployment rate decline into 4.1%. When production in local area increase, it will followed by raising demand for employment as more employee demanded to make the product. The rate of unemployment in Japan relatively low because many ageing workers still count as a working age.

Japan is depending upon the export strength to support production. The export in this country is high because the level of yen toward other currencies is weak (line 42). Japan could achieve balance of payment surplus because their export is greater than import.

Japanese government tends to let the system of their exchange rate to float freely in the past two years (line 46). Japan interest rate is the lowest in the world with only 0.25% (line 50). The advantage of having low rate of interest is that it will encourage investment. But, the setback