Deflation expectations and Japan's lost decade

Roberto Piazza

No 274, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: E2 E5 G21 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_274_15

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