Chronic Deflation in Japan


  • We would like to thank Kazuo Ueda, Andrew Levin, Eiji Maeda, Etsuro Shioji, Nobutoshi Kitaura, David Weinstein, Neil Ericsson, Hibiki Ichiue, the editors of the Asian Economic Policy Review (AEPR), and the participants in the AEPR Conference, the BoJ-CARF Joint Conference, the BIS Research Workshop, as well as those in seminars at Columbia University, the Federal Reserve Board, and the Federal Reserve Bank of New York, for useful comments and discussions. We are solely responsible for any remaining errors in the paper. The views expressed in this paper do not necessarily reflect those of the Bank of Japan.


Japan has suffered from a long-lasting but mild deflation since the latter half of the 1990s. Estimates of a standard Phillips curve indicate that a decline in inflation expectations, the negative output gap, and other factors such as a decline in import prices and a higher exchange rate all account for some of this development. These factors, in turn, reflect various underlying structural features of the Japanese economy. This paper examines a long list of these structural features that may explain Japan's chronic deflation, including the zero lower bound on the nominal interest rate, public attitudes toward the price level, central bank communication, weaker growth expectations coupled with declining potential growth or the lower natural rate of interest, risk-averse banking behavior, deregulation, and the rise of emerging economies.