2025 Reports

Japan’s Chronic Deflation: Causes and Consequences

Watanabe, Tsutomu

For nearly 30 years, starting in the mid-1990s, Japan has experienced an inflation rate very close to zero. This prolonged period of near-zero inflation is referred to as “chronic deflation.” While some other countries have faced brief episodes of low or negative inflation, Japan is unique in having endured such an extended timeframe of 30 years. In this chapter, I will examine the reasons behind chronic deflation, focusing on why it has persisted for so long and the impact it has had on economic welfare. Additionally, since spring 2022, inflation patterns seen in the post-pandemic periods of the US and Europe have reached Japan, resulting in a shift in Japan’s consumer price inflation rate from near zero to positive. I will explore the mechanisms behind this change and consider whether it could help Japan finally escape chronic deflation.

JEL Classification Number : E31; E52

Keywords: chronic deflation; kinked-demand curves; consumers’ inflation expectations; wage-price spirals; pricing power; the zero-inflation norm; the cost of deflation