The Jayflation Enigma

So it would appear that Japan is now ready for one more stimulus package. This package seems to be aimed at helping the SMEs. Although I won't comment on how beneficial this package will be (probably better than those first issued under the Aso administration), it still brings one important question to my mind. Japan's economy is built around a main core of efficient exporting companies. These national champions account for most of the growth and employment in the Japanese economy, but they have been badly hurt by the strong appreciation of the Yen relative to the Dollar of the past year. Whenever the Yen becomes stronger than the currency of its main exporting rivals (and consumer markets), Japan sells less products and Japanese companies's profits diminish - not so much as a result of the diminished sales, but as a result of the foreign exchange rate and its relation to costs and revenue. 

Obviously, this hurts the exporting sector.

In addition to deteriorating external terms of trade, deflation continues to batter the Japanese economy. Though most people know  that excessive inflation (at least inflation rates above the GDP growth and interest rates) are bad, they usually welcome deflation as something good (rationale being that the opposite of something bad is good, right?). Well, no. Persistent deflation has a negative effect on consumption: when people expect prices to fall, they trade present for future consumption as the terms will be more advantageous in the future. Same goes for borrowing (for personal and investing purposes).

Obviously, this hurts consumption.

So now you have a situation where both the export machine and domestic consumption are failing due to related causes. So why doesn't the BoJ just print more money? This would erode the high value of the Yen relative to other currencies (primarily the greenback, but also the Korean Won and Yuan) and provide some breathing space to the exporting giants. A little inflation would also go a long way to pushing consumption even though it may seem that the Japanese are getting poorer (but seriously, how rich can you be if you are not growing? in 1995 income per capita in Japan was about 51% higher than in the US. By 2005 that had fallen to 85% of that of the USA according to IMF figures).

Now, in a highly indebted country like Japan inflation can be risky because it would deteriorate the weight of the debt in relation to its GDP, as the debt is usually issued in a foreign currency (the Dolar). But Japan is no normal country in this regard as most of it (95%) is domestically owned. Thus despite having a national debt of about 218% of GDP, printing money would not necessarily have an adverse effect on it, or at best enable the state to actually buy back some of its obligations!

So given all this, why doesn't the BoJ encourage inflation? I've been looking for some time now, but haven't found an answer that fully satisfies me. The only answer that seems to be consistent throughout, seems to be: 分からない.