Consumer Spending Much of Japan’s economy is driven by consumer spending. A large portion of Japanese income is spent on personal consumption. This means that nearly all Japanese households spend their income on buying items for themselves and their families. A high percentage of Japanese households live below the poverty line. In order to stimulate consumer spending, the Japanese government cuts taxes, increases bank loans and makes large purchases, such as electronic devices and automobiles. In addition, to stimulate spending, the government encourages citizens to build homes, repair homes and spend money on other items.

Investment Spending Although consumer spending accounts for a large percentage of Japan’s economy, it lags far behind in infrastructure investment and other types of corporate activity. The primary reason for this is that most Japanese corporations are family businesses, which tend to specialize in specific products and services. Consequently, they are not able to make large-scale investments in different businesses and sectors that might yield better returns. Consequently, Japan’s corporate sector remains largely isolated from global markets, with the exception of small niche companies that are involved in producing goods for local markets.

Trade Deflationary Recession or deflation is another reason why Japan’s economy has experienced economic sluggishness over the past year or so. During a period of economic growth, consumer spending increases due to higher incomes and more demand for products. When this occurs, the value of the dollar decreases. As a result, inflation is pushed up, leading to lower overall economic activity. The current state of Japan’s economy reflects many of the complications inherent in trying to forecast the behavior of consumer spending. The fact that deflation has been a consistent problem for the Japanese economy over the past two decades, while the consistent high growth has been the norm over the past quarter century, complicates attempts to analyze the factors behind Japan’s growth and currency valuation.

Trade Deflationary Recession or Price Rise The recent economic slowdown in Japan is caused by deflation, which is essentially a condition where there is no further growth in consumer spending as a result of continuous falls in prices of key products. As a result, consumers hold back their buying of non-essentials items, thus preventing the buildup of additional inventory. Eventually, consumers decide to increase their consumption of essential products, causing a surge in prices that is both deflationary and inflationary in nature. The end result is that, even when consumers have increased their purchases of essential items, the cost of these products has fallen significantly. Japan’s economy has suffered considerably because of this trend.

Inflation Deflationary Recession or Abrupt Recession While most indicators suggest that the recent economic slowdown in Japan is likely to be short-lived, the effects of deflation have proven to be long-lasting. As deflation eats away at the ability of consumers to buy necessary products, firms are forced to reduce their sales of goods and services, leading to a simultaneous rise in supply and demand. This, in turn, leads to price increases in these products and services, which serve only to exacerbate the situation.