A more significant impact of inflation arises from its effect on interest rate and the dynamic sustainability of the fiscal situation. High rates of inflation signal weak resolve to control inflation and imply higher expected inflation in future. This gives rise to upward rigidity in nominal interest and leads to high debt service burden on the budget, thus reducing the manoeuvrability of fiscal management.
In the meantime, due to heightened uncertainty over the economic outlook, long-term interest rates declined considerably. Stock prices continued a downtrend reflecting the concern over the worldwide stock market plunge, the further deterioration in economic indicators, and the persistent uncertainty over the resolution of the problems with Japan’s financial system.