Japan has experienced near continuous deflation in its GDP deflator since 1994, averaging about -1% per year. As I recall there were small positive upticks around 1996 and 2008, but I believe they are back in deflation. Paul Krugman was one of the first to address the Japanese situation, and also to understand the importance of an aggressive monetary policy. Here is what he had to say in 1999 about fiscal stimulus in Japan:
I have been wrong about a lot of things lately. . . . Of course, Japan could surprise us all. Perhaps this time massive fiscal deficits will not only keep the economy afloat, but provide the long-awaited, never-delivered jump-start: the self-sustaining expansion in private demand that continues even as the public works programs wind down. But to believe in that jump-start you must believe in a very exotic model of the macroeconomy, one in which there are multiple equilibria and a temporary fiscal expansion can jolt the economy out of a low-level trap. Well, maybe. But isn’t it funny that the orthodox policy now being followed can be justified only by invoking highly speculative, dubious models with little empirical backing; whereas the radical, unorthodox policy I have advocated flows naturally from textbook economics?
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