Japan's Economy
Living With Deflation
Why Japan experienced years of falling prices, why deflation is harmful, and how deflationary expectations became entrenched.
From the late 1990s, Japan experienced long periods of deflation: falling prices.
Why deflation is harmful
- Delayed spending: why buy now if it’s cheaper later?
- Rising real debt: debts stay fixed while prices and wages fall.
- Falling wages.
- Low growth.
Why it happened
- Weak demand after the bubble.
- Banks reluctant to lend.
- Ageing population spending less.
- Expectations: people and firms came to expect prices wouldn’t rise.
The zero lower bound
The Bank of Japan cut rates to zero in 1999. But rates can’t easily go much below zero, limiting its tools.
Entrenched expectations
Firms kept prices unchanged for years, and workers accepted flat wages. Breaking this mindset proved difficult.
The turn
Inflation returned after 2022, driven by global energy prices and a weak yen, and wages began rising faster.
A popular snack in Japan kept the same price for decades. When the maker finally raised it in 2019, it made a public apology in an advertisement.
Deflation can delay spending, raise real debts and lower wages.
- Japan faced long periods of deflation from the late 1990s.
- Deflation delays spending and raises real debt burdens.
- Rates hit zero in 1999, limiting monetary policy.
- Inflation returned after 2022.
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