Japan has been the victim of deflation while a large part of the world is facing inflationary crisis due to spiraling prices of commodity goods and rise in the oil prices.
The tsunami crisis is the biggest crisis that the country is facing after World War II. The earthquake has killed more than 25000 people and the nuclear crisis looms large on the country.
The deflationary pressure along with the burden on rebuilding the whole country is what putting govt. in difficult position.
The extent of reconstruction is putting severe strain on the policy measures of the govt. The loose monetary policy and commodity price rise will lead to inflation while tighter one will create strain on the available resources. BoJ needs to trade carefully.
Japan economy has faced severe demand shock during the economic crisis that started with bankruptcy of Lehman brothers. But, now the economy is facing supply shock after the devastation caused by tsunami and disruption in the production and supply chain.
But even the financing the reconstruction is going to be tricky. The Japan economy which stands at $5 trillion has public debt double the size. As most of the credit rating agencies have cut the rating for the govt. bonds, the govt. can raise the money through either increasing tax or issuing quake-related bonds. The large public debt will prevent the govt. from bond issuance.