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Deflation expectations and Japan's lost decade

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  • Roberto Piazza

    (Bank of Italy)

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.

Suggested Citation

  • Roberto Piazza, 2015. "Deflation expectations and Japan's lost decade," Questioni di Economia e Finanza (Occasional Papers) 274, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_274_15
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2015-0274/QEF_274.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    deflation; lost decade; inflation expectations;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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