1. How has deflation affected the Japanese consumer?

As explained in the article, deflation has been a way of life for the Japanese people for some time. As they adjusted to lower wages, they had less money to spend and aggregate domestic consumption became a small part of total output relative to exports. Deflation also contributed to reduced consumption. Although conventional wisdom says to by more at lower prices, prices just kept going down and people put off buying, thinking prices would go down further. That seems to be turning around. In The New York Times article, Mr. Yamamoto said, "Before, when you bought, you lost, now, when you don't buy, you lose." The deflationary response became a part of the Japanese consumers' thinking and could be difficult to overcome. Repeating what Mr. Sheard said, "Everyone in Japan has been living so long in the deflationary environment that this behavior is in the neurons of their brains."

2. What do you think the Bank of Japan is trying to achieve by raising interest rates?

Hopefully, the students will recognize that this is traditional monetary policy. Since the economy has finally started to grow and increase inflationary pressure, the central bank wants to stop inflation before it begins. The normal response for any central banker who wants to ward off inflation is to increase interest rates and relieve some of the upward pressure on prices by curbing spending, both consumer spending and investment spending.

3. Using any source available, compare the savings rate in Japan and the United States and discuss the consequences of having either too high or too low a rate?

Japanese and United States savings rates have been significantly different for many years. The savings rate in Japan has been as high as 25 percent of national income while rates in the U.S. have fallen below zero in 2005. While Japanese households have historically saved between 15 and 18 percent of disposable income, U.S. households have saved only an average of 3 to 5 percent and for 2005 actually spent more than they took in as disposable income. National savings helps keep interest rates low and provides money for business investment which stimulates economic growth. The high savings rates in Japan have helped fuel their economic growth without depending on foreign investment. The U.S., on the other hand, depends heavily on foreign capital for economic growth and capital formation. For more on the negative savings rate in the U.S., see http://www.msnbc.msn.com/id/11098797/. For more on the high savings rates in Japan see http://www.findarticles.com/p/articles/mi_m1282/is_n5_v42/ai_8782351

Multiple Choice/True False Questions