In the FT article “Japan’s core inflation hits 41-year high with central bank under policy pressure” (20 January 2023), we can read: “Japan's core inflation rate rose to a new 41-year high of 4 per cent in December [...]. Official statistics released on Friday showed core inflation, which excludes volatile food prices but includes oil, reached its fastest pace since December 1981, exceeding the Bank of Japan’s 2 per cent inflation target for the ninth consecutive month. The release came two days after Japan’s central bank defied market pressure and maintained its ultra-loose monetary policy, arguing that wage growth was not strong enough to sustainably achieve its inflation target. Uniqlo owner Fast Retailing and other large companies have in recent weeks announced plans to dramatically raise wages, fuelling hopes that rising prices could finally drive salaries higher in a country that has wrestled with three decades of price stagnation.” (a) Using a 3-equation model, represent graphically the Japanese economy. Explain what assumptions you made to represent this economy. (100 words max) (b) Explain in some detail what could happen to the Japanese economy if Japan's central bank monetary policy decisions turn up to be too loose. (200 words max)
In the FT article “Japan’s core inflation hits 41-year high with central bank under policy pressure” (20 January 2023), we can read:
“Japan's core inflation rate rose to a new 41-year high of 4 per cent in December [...]. Official statistics released on Friday showed core inflation, which excludes volatile food prices but includes oil, reached its fastest pace since December 1981, exceeding the Bank of Japan’s 2 per cent inflation target for the ninth consecutive month. The release came two days after Japan’s central bank defied market pressure and maintained its ultra-loose
(a) Using a 3-equation model, represent graphically the Japanese economy. Explain what assumptions you made to represent this economy. (100 words max)
(b) Explain in some detail what could happen to the Japanese economy if Japan's central bank monetary policy decisions turn up to be too loose. (200 words max)
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