How does boosting Japan's growth fight deflation?

Hi guys,

I am new here and got a question.

I stumble upon a Article on Bloomberg regarding

Shirakawa outgoing BOJ Governor said that efforts to boost growth can increase the impact of stimulus.

Economists including JPMorgan's Kanno said that a key to ending deflation is higher wages. Toyota Motor Corp agreed
this week to pay its employees in Japan the biggest bonus in five year as the world's largest automaker expects its
net income to triple this fiscal year.

and also

Prime Minister Shinzo Abe said Japan will join negotations on an American-led regional trade to boost
growth and strengthen ties with the U.S. Abe want to use these talks to promote structural reform in Japan,
help exporters and boost domestic productivity. Japan's particiation would boost its GDP if
it abolished all tariffs.


I am wondering why Boosting Growth would help Japan impact its stimulus and fight deflation, I thought a higher GDP create inflation.


can anyone enlighten me the link of boosting growth help japan fight deflation.

Thanks for helping!!

That's right, they boost growth to fight deflation. And, as you have said, higher GDP creates inflation - i.e. eliminates deflation. That's what they are trying to do.

sometimes stimulus can be misdirected..... if toyota or some such large japanese company takes the money and uses it to bulid factories in america, it helps the american gdp/economy/workers at the expense of japan gdp/economy/workers..... shirakawa would probably prefer the money to be spent there, japan, to build factories and employ workers to raise japans gdp......

abe realizes that protectionism tarrifs at first appear the answer but in the end can be nothing more than a wall between economys..... he would probaly prefer the walls be torn down so their exporters have free trade.....

//----

what japan needs, and might never get, is to change their habits...... ie, they need to learn about recreational spending and credit cards...... as it is now, all they do is work hard and save and work hard and save and work hard and save.... they are a very frugal people....

if they saved much much less and spent much much more, like americans, it would increase domestic jobs..... this would increase employment to the point where companies would have to pay more in wages to attract workers..... and then charge more in prices to cover the added cost.....

this wage price sprial would create inflation and raise gdp...... h

I felt that I need to add more detail here as economics is my graduate major focusing on monetary policy.

First of all, growth is always pitted with inflation. Well, that is classic nothing new here. I'll try to explain more detail in informal manners, what I write here is for general mass so spare me a little doc!

We'll start with definition, growth here means GDP(Gross National Product) growth. GDP is calculated or defined as ALL value created on the economics. For example: John have a business he use 100k worth of raw material, 50k worth of energy, and 200k worth of labor(nice isn't he, he creates job) a year. If his product is sold at 500k, he create added value of 150k(500k-100k-50k-200k) plus his labor produces another 200k(count separately in household as labor income). This process in the economy is counted and added up as GDP.

John himself has 150k from this process, the labors had 200k. John and his labors will spend portion of this value for consumption, thus creates demand for goods in the economy. Imagine if on the next years business is good and John got 200k instead of 150k and add another labor(nice isn't he, LOL!) and their total income is 300k instead of 200k the demand for goods is increasing.

Now, we will switch to the supply side. The supply side of the economic is not very flexible, producers will forecast the next period and adjust his production based on this forecast. Usually this forecast won't deviate much from the last period result. So they will order X amount of material, and process it with available labor(well, process of adding workers takes some time). If economics condition is improving the supply is not enough to satisfy demand, and producer will need to ramp up his production fast. A surge demand for raw material will increase its price, producers is also need more labor. First they will ask for extra shift and paid overtime, if this holds longer they will ad new worker(more wage paid). Producer also faced with capacity limit of their fix assets(machinery, warehouse) so there is some short term limit on this thus supply is a bit rigid.

Spend more per unit in the face of increasing demand(and to increase his profit), producer will add his price to the level where demands still accept this price. I think this is enough to explain growth creates inflation, thus fight deflation as enivid states but has some detail explained.


Moving on to what finance department who creates fiscal policy. What the finance department of a country focus is growth, so the will use the funds available to the to somehow accelerate of facilitate the growth creation. What the used to do is related to subsidy and tax policy, it is the easier one. On the other side inflation will reduce this effect by decreasing the real value of GDP(to make it simple) or all the added value in the economy as now for the same amount of money you will get lesser goods as price increase. The central bank role is to somehow balancing this growth and inflation, as growth is on fiscal side and out of their control they will concentrate more on inflation by using monetary policy.

The most recent accepted method in inflation control is by using central bank credibility theory. So do not put a blame on Bernanke if it looks that throw money from a helicopter, what he do is reasonable. While he states he will spend for example 700billion, actually he will only spend the initial amount. He states 700billion to ease the anxiety of the economics agent, after their expectation rise uncle Ben will stop pouring money and economics will revitalized. Good job there, but the general mass did not to knew this process to make this effective.

Put politician in the middle of this process, and you got what happened in Europe! Don't blame on economist, they only control what they are allowed by the ruling parties.

Thanks Guys !