question: Why is Japan suffering from deflation, and why does the government want to stop it?
comment: I think the question why is probably complicated and even reputable economists will disagree. Deflation is defined as the general reduction of the prices of goods and services in the economy. We might be used to certain things becoming less costly over time - personal computers for example. However, in general across the economy, most prices rise over time; ie there is inflation. Inflation impacts consumer behavior because it incentivizes spending rather than saving because $10 today buys more stuff than $10 next year. When there is a period of deflation, holding on to money and postponing consumption makes more sense because the reverse is true; e.g. if you know that PC you wanted would be cheaper next month, you'd postpone buying it now. So the aggregate result of consumers postponing consumption is aggregate demand falls - and that leads to underutilized capacity in the economy (factories cannot run fully, etc) which then leads to lower profits and lack of investment and slower economic growth. Deflation rewards savings and punishes debt. Sounds like a good thing but this is also a problem because the money supply is also reduced when people don't borrow (banks have excess reserves) The overall lowering of economic activity leads to reduced employment and investment. Why is Japan suffering from deflation? Perhaps several reasons: over investment in capacity in the past, (too many factories chasing insufficient demand); asset bubble burst (Japanese real estate prices were sky high until mid 1990's - then it crashed) - since people feel they're less wealthy they spend less; too much debt, possibly companies and people reduced consumption to pay down debt; demographics - Japan has a rapidly aging population and older people spend less and save more as they plan for retirement. Then there are fairly technical monetary policy reasons which are harder to understand - basically whether the central bank policies reduced money supply too drastically, were they too late in reducing interest rates. Government action also contributes: could they have taken more bad loans off company and bank books? should the government go further into debt to fund infrastructure spending?
passages: He explains what actually has occurred in Japan. The Japanese companies are unwilling to borrow money and pay interest which old people obtain, which may discourage the old people to spend. Thus Japan's tenacious deflation has been caused by the weak demand.
   BULLET::::- Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods (due to lower wages and fast growth in those countries) and inexpensive raw materials, many of which reached all time real price minimums in the early 2000s. Thus, prices of imported products are decreasing. Domestic producers must match these prices in order to remain competitive. This decreases prices for many things in the economy, and thus is deflationary.
   In November 2009, Japan returned to deflation, according to the Wall Street Journal. Bloomberg L.P. reports that consumer prices fell in October 2009 by a near-record 2.2%.
  
  Section::::Historical examples.:United Kingdom.
   By 2014, critics of Japanese currency intervention asserted that the central bank of Japan was artificially and intentionally devaluing the yen. Some state that the 2014 US-Japan trade deficit — $261.7 billion — was increased unemployment in the United States. Bank of Korea Governor Kim Choong Soo has urged Asian countries to work together to defend themselves against the side-effects of Japanese Prime Minister Shinzo Abe's reflation campaign. Some have (who?) stated this campaign is in response to Japan's stagnant economy and potential deflationary spiral.
   Deflation started in the early 1990s. The Bank of Japan and the government tried to eliminate it by reducing interest rates and 'quantitative easing', but did not create a sustained increase in broad money and deflation persisted. In July 2006, the zero-rate policy was ended.
  
  Systemic reasons for deflation in Japan can be said to include:
  
  BULLET::::- Tight monetary conditions. The Bank of Japan kept monetary policy loose only when inflation was below zero, tightening whenever deflation ends.
   Despite having interest rates down near zero for a long period of time, the quantitative easing strategy did not succeed in stopping price deflation. This led some economists, such as Paul Krugman, and some Japanese politicians, to advocate the generation of higher inflation expectations. In July 2006, the zero-rate policy was ended. In 2008, the Japanese Central Bank still had the lowest interest rates in the developed world, but deflation had still not been eliminated and the Nikkei 225 has fallen over approximately 50% (between June 2007 and December 2008). However, on 5 April 2013, the Bank of Japan announced that it would be purchasing 60–70 trillion yen in bonds and securities in an attempt to eliminate deflation by doubling the money supply in Japan over the course of two years. Markets around the world have responded positively to the government's current proactive policies, with the Nikkei 225 adding more than 42% since November 2012. The Economist has suggested that improvements to bankruptcy law, land transfer law, and tax laws will aid Japan's economy. In recent years, Japan has been the top export market for almost 15 trading nations worldwide.
   With the above-mentioned view point from the mobilizing of finances by the government or the action to monetary squeeze by the BOJ, or, from the view point that it has been deflation recession caused by long termed low demand, there are criticisms that it also cause an effect hurt power of economy the tend to promote increase efficiency of supply side. On the other hand, there are following suggestions for that criticisms:
   Deflation in Japan started in the early 1990s. On 19 March 2001, the Bank of Japan and the Japanese government tried to eliminate deflation in the economy by reducing interest rates (part of their 'quantitative easing' policy). Despite having interest rates near zero for a long period, this strategy did not succeed. Once the near-zero interest rates failed to stop deflation, some economists, such as Paul Krugman, and some Japanese politicians spoke of deliberately causing (or at least creating the fear of) inflation. In July 2006, the zero-rate policy was ended. In 2008, the Japanese Central Bank still had the lowest interest rates in the developed world and deflation continued.
   BULLET::::- Fear of insolvent banks:  Japanese people are afraid that banks will collapse so they prefer to buy (United States or Japanese) Treasury bonds instead of saving their money in a bank account. This likewise means the money is not available for lending and therefore economic growth. This means that the savings rate depresses consumption, but does not appear in the economy in an efficient form to spur new investment. People also save by owning real estate, further slowing growth, since it inflates land prices.
   BULLET::::- Unfavorable demographics. Japan has an aging population (22.6% over age 65) that is not growing and will soon start a long decline. The Japanese death rate recently exceeded its birth rate.
  
  BULLET::::- Fallen asset prices. In the case of Japan asset price deflation was a mean reversion or correction back to the price level that prevailed before the asset bubble. There was a rather large price bubble in stocks and especially real estate in Japan in the 1980s (peaking in late 1989).
   From 1989 to 2003, Japan was suffering from a long deflationary period. After experiencing economic boom, the Japanese economy slowly declined in the early 1990s and entered a deflationary spiral in 1998. Within this period, Japanese output was stagnating; the deflation (negative inflation rate) was continuing, and the unemployment rate was increasing. Simultaneously, confidence in the financial sector waned, and several banks failed. During the period, the Bank of Japan, having become legally independent in March 1998, aimed at stimulating the economy by ending deflation and stabilizing the financial system. The "availability and effectiveness of traditional policy instruments was severely constrained as the policy interest rate was already virtually at zero, and the nominal interest rate could not become negative (the zero bound problem)."
   Both the European Central Bank starting in 2014 and the Bank of Japan starting in early 2016 pursued the policy on top of their earlier and continuing quantitative easing policies. The latter's policy was said at its inception to be trying to 'change Japan’s “deflationary mindset.”' In 2016 Sweden, Denmark and Switzerland—not directly participants in the Euro currency zone—also had NIRPs in place.
  
  Countries such as Sweden and Denmark have set negative interest on reserves—that is to say, they have charged interest on reserves.
   In response of deflationary pressures, the Bank of Japan, in coordination with the Ministry of Finance, launched a reserve targeting program. The BOJ increased the commercial bank current account balance to ¥35 trillion. Subsequently, the MoF used those funds to purchase $320 billion in U.S. treasury bonds and agency debt.
   Systemic reasons for deflation in Japan can be said to include:
  
  BULLET::::- Fallen asset prices. There was a large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989).
   After the first meeting of the Bank's monetary policy committee after he had taken office in April, Kuroda announced an aggressive programme of easing intended to double the money supply and achieve the 2 percent inflation target at "the earliest possible time". Over the first six months of the second Abe Cabinet, the Yen fell from a high of ¥77 to the dollar to ¥101.8, and the Nikkei 225 rose by 70 percent.
   By 2016 it was apparent three years of monetary easing had had little effect on deflation, and the Bank of Japan instigated a review of its monetary stimulus program.
  
  Section::::Mission.
  
  According to its charter, the missions of the Bank of Japan are
  
  BULLET::::- Issuance and management of banknotes
  
  BULLET::::- Implementation of monetary policy
  
  BULLET::::- Providing settlement services and ensuring the stability of the financial system
  
  BULLET::::- Treasury and government securities-related operations
  
  BULLET::::- International activities
  
  BULLET::::- Compilation of data, economic analyses and research activities
  
  Section::::Location.
   Joseph Stiglitz said that Japan's economy was still fragile, and the planned consumption tax hike from 5% to 8% would plunge it into recession.
  
  Section::::Debate.:Demand management.
  
  Section::::Debate.:Demand management.:Support.
  
  The International Monetary Fund characterized the program as "a unique opportunity to end decades-long deflation and sluggish growth and reverse the rise of public debt," but argued that "all three arrows need to be launched for the policies to succeed. Uncertainty about the ambition of fiscal and structural reforms is adding to underlying risks."
   In mid January 2013, Japan's central bank signaled the intention to launch an open ended bond buying programme which would likely devalue the yen. This resulted in short lived but intense period of alarm about the risk of a possible fresh round of currency war.
   In the first half of 2014, The Toyota became the biggest automaker in the world selling 5.1 million vehicles in the six months ending June 30, 2014, an increase of 3.8% on the same period the previous year. Volkswagen AG recorded sales of 5.07 million vehicles.
  
  Prime Minister Shinzo Abe sought to end deflation, but Japan entered recession again in 2014 largely due to a rise in sales tax to 8%. Abe called an election in December, and promised to delay further sales tax hikes to 2018. He won the election.
   Section::::Historical examples.:Ireland.
  
  In February 2009, Ireland's Central Statistics Office announced that during January 2009, the country experienced deflation, with prices falling by 0.1% from the same time in 2008. This is the first time deflation has hit the Irish economy since 1960. Overall consumer prices decreased by 1.7% in the month.
   Numerous senior central bankers and finance ministers issued public warnings, the first being Alexei Ulyukayev, the first deputy chairman at Russia's central bank. He was later joined by many others including Park Jae-wan, the finance minister for South Korea, and by Jens Weidmann, president of the Bundesbank. Weidmann held the view that interventions during the 2009–11 period were not intense enough to count as competitive devaluation, but that a genuine currency war is now a real possibility. Japan's economy minister Akira Amari has said that the Bank of Japan's bond buying programme is intended to combat deflation, and not to weaken the yen.
   In mid January 2013, Japan's central bank signaled the intention to launch an open ended bond buying programme which would likely devalue the yen. This resulted in numerous senior central bankers and finance ministers warning of a possible fresh round of currency war. First to raise the alarm was Alexei Ulyukayev, the first deputy chairman at Russia's central bank. He was later joined by many others including Bahk Jae-wan, the finance minister for South Korea, and by Jens Weidmann, president of the Bundesbank. Weidmann held the view that interventions during the 2009-11 period were not intense enough to count as competitive devaluation, but that a genuine currency war is now a real possibility. Japan's economy minister Akira Amari has said that the Bank of Japan's bond buying programme is intended to combat deflation, and not to weaken the yen. Most commentators have asserted that if a new round of competitive devaluation occurs it would be harmful for the global economy. However some analysts have stated that Japan's planned actions could be in the long term interests of the rest of the world; just as he did for the 2010-11 incident, economist Barry Eichengreen has suggested that even if many other countries start intervening against their currencies it could boost growth worldwide, as the effects would be similar to semi-coordinated global monetary expansion. Other analysts have expressed skepticism about the risk of a war breaking out, with Marc Chandler, chief currency strategist at Brown Brothers Harriman, advising that: "A real currency war remains a remote possibility."
   This new iteration of Abenomics was met with some criticism by commentators, who argued that it was not yet clear if the first three arrows had succeeded in lifting Japan out of deflation (inflation was some way below the 2 percent target), that the new arrows were merely presented as targets without the necessary policies to meet them, and that the targets themselves were unrealistic. However, opinion polls during the final months of 2015 showed the Abe cabinet's approval ratings once again climbing into positive figures after the change in emphasis back to economic issues.
   The consumption tax hike from 5 to 8 per cent brought about the self-induced recession in 2014, which discouraged Japanese consumers from spending and gave them a signal of further austerity. The tax hike seemed to start permanently damaging the Japanese economy. Japan's GDP contracted by 0.8 per cent in annual terms in the third quarter of 2015, which made Japan go into a technical recession.
   Koichi Hamada, a monetary adviser for Shinzo Abe, warned that the planned VAT hike could hurt Japan's economy which started to recover from long recession and deflation. He says that the Japan government should defer the tax hike so that it could not discourage consumption, adding that economists such as Jeffrey Frankel have suggested the gradual increase of the rate of the tax by one percent annually. Although Hamada is concerned about the effects of the tax hike, he expects that monetary easing by BoJ can offset its negative effects, 
  
  applying the Mundell-Fleming model to Japan.
  