Chronic Deflation in Japan
Japan has suffered from 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 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.
Why have price developments in Japan been so weak for such a long time? What can leading-edge economic theory and research tell us about the possible causes behind these developments? Despite the obvious policy importance of these questions, there has been no consensus among practitioners nor in academia. This paper is an attempt to shed some light on these issues by relying on recent works on the subject in the literature.