Deflation Expectations and Japan's Lost Decade

24 Pages Posted: 25 Aug 2015

Date Written: June 25, 2015


Starting from the early 1990s, GDP in Japan stagnated for about a decade while inflation has been persistently low, at times even negative. This paper provides new stylized facts about the Japanese deflationary process and puts these facts into the context of the literature addressing the origins of the Japanese "lost decade". In order to properly understand the evolution of inflation in Japan and the role of monetary and fiscal policy, a crucial question is whether the deflationary process, a phenomenon specific only to Japan during the period under consideration, was anticipated by agents. The paper suggests a positive answer to the question. In particular, I show that once a "global" inflation forecasting error, common across advanced countries, is removed from Japanese inflation expectations, then the remaining "idiosyncratic" inflation forecasting error is close to zero at various forecasting horizons. This indicates that the Japan-specific deflationary process was fully anticipated by agents, with medium-term (and "idiosyncratic") inflation expectations disanchoring very soon along the deflationary path.

Keywords: deflation, lost decade, inflation expectations

JEL Classification: E2, E5, G21

Suggested Citation

Piazza, Roberto, Deflation Expectations and Japan's Lost Decade (June 25, 2015). Bank of Italy Occasional Paper No. 274, Available at SSRN: or

Roberto Piazza (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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