For almost a decade, the Japanese have started to adopt a risk-averse mindset after the fall of the dotcoms. Due to the circumstances, zero-return in cash has become the mindset of the people. While prices continue to drop, people further delay their consumption for the hope of lower prices. This hoarding of cash or investing in zero-return or non-interest-bearing savings leads to stagnation and later, worsening deflation in the economy. Thus the country wishes for some inflation to happen by increasing aggregate demand either through an increase in consumer spending, or channeling of money to some real investments in order to stimulate growth in the economy.
Because of inflation, the relatively low or zero-return of investments most Japanese consumers have produces a negative interest rate. The Japanese Central Bank now hopes that consumers will then shift their investments to interest-bearing or higher-yielding investments to offset the effect of inflation, such as shares and real estate in order to give a boost to the economy.
The cost-push inflation in the economy thus requires the Japanese Central Bank to use some monetary policy to curb it. However, Japanese Central Bank cannot just increase the interest rate in the meantime. While the global economy seems to pose a threat, increasing the interest rate will hurt the economy and worsen the impact of this threat if it happens. Thus, the Japanese Central Bank will keep the interest rates low in order to lessen the impact of the economic crisis abroad to the Japanese economy.
The aggregate prices or the overall inflation within an economy is set by the interaction of the aggregate demand and aggregate supply. On one hand, aggregate demand is determined by the total amount .of consumption, investment, government spending and net exports in an economy.