Japan's Economy and Prices over the Past 25 Years: Past Discussions and Recent Issues

This paper provides an overview of economic activity and prices in Japan since the 1990s, based on discussions mainly in academia as well as the survey of corporate behavior, and then discusses some issues related to the signs of change in recent years. In the 1990s, monetary policy faced a lower bound on nominal interest rates as the economy fell into stagnation and mild deflation due to various factors both on the demand and supply sides. In the 2010s, the economy recovered thanks to the effects of quantitative and qualitative monetary easing and other measures, which brought about a situation of no longer being in deflation. However, the "price stability target" of 2 percent could not be achieved while people's mindset and practices based on the assumption that wages and prices were unlikely to rise remained. After the pandemic in the 2020s, as the economic recovery and the tightening of labor markets as well as the surge in import prices have strengthened the virtuous cycle between wages and prices, it came in sight that the "price stability target" would be achieved in a sustainable and stable manner. Against this background, signs of change have been seen in the global economic landscape, labor markets, and firms' price-setting behavior. The mindset and practices based on the assumption that wages and prices were unlikely to rise, which took root during the deflation period, appear to be dissolving.