Vir: OECD

“At present there is no reason to expect that overall prices will drop sharply and exert deflationary pressure on the entire economy,” policy makers wrote in their monthly report, signed off by the governor.

That governor was Yasuo Matsushita and the report was published in January 1998. Within six months, Japan’s consumer prices excluding food began falling in a trend that would mark the next 15 years.

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The Bank of Japan’s complacency hurt an economy that has slipped in size behind China’s as companies and consumers retrenched in anticipation of even cheaper prices. The country’s gross domestic product, unadjusted for changes in price, was 10 percent smaller last year than its 1997 peak. The Nikkei 225 Stock Average, at 14,898 (NKY) today, is less than half its 1989 high, and public debt tops 200 percent of GDP.

…

“Until too late, the Bank of Japan didn’t think Japan was going to be entangled with deflation,” said Kenji Yumoto, vice chairman of the Japan Research Institute Ltd. and an economic adviser to the government in the late 1990s. “The ECB still can’t be complacent. Europe is lucky to have Japan’s case study.”

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“We don’t see much of a similarity with what happened in Japan,” Draghi said. “There’s certainly going to be a subdued inflation — a low inflation — for an extended, protracted period of time, but no deflation.”

Vir: Bloomberg