Before you start
What you'll be able to answer
- What is deflation, and how far did prices in Japan fall from 1999 to 2005?
- Why did prices keep falling, and had anyone expected it?
- Why did falling prices matter for firms carrying heavy debts?
Where this sits
Japan's Lost Decade — 1989 to 2006 · this module is lit
- Dec 1989Share prices in Japan peak
- Aug 1990The Bank of Japan's last rise in its discount rate, the interest rate at which it lent to banks
- Aug 1992The government announces the first of six spending packages up to 1995
- 1995-96The first direct use of taxpayers' money against financial instability covers losses at failed housing-loan companies, the jusen
- 1 Apr 1997The consumption tax rate, a tax on what people buy, is raised
- Nov 1997Sanyo Securities, Hokkaido Takushoku Bank and Yamaichi Securities fail
- Oct-Dec 1998Japan's parliament, the Diet, makes more public money available to deal with banks' bad loans, and the state takes over the Long-Term Credit Bank and Nippon Credit Bank
- Feb 1999The Bank of Japan begins its zero interest rate policy, pushing its overnight rate as low as possible
- Mar 1999Public capital, new capital paid for by the state, is put into the major banks
- Mar 2001The Bank of Japan begins quantitative easing, a target for the money banks keep in their accounts with it
- Oct 2002The Financial Services Agency, the banking regulator, launches its programme to cut bad loans
- Mar 2006The Bank of Japan ends quantitative easing
In 1999 prices in Japan began a run of yearly falls
By 1999 Japan's economy had been weak for most of a decade. The Bank of Japan, Japan's central bank, had cut its interest rate in steps, and the state had put public money into the banks. Then a new problem took hold. In 1999 the prices households paid for the things they bought were lower, on average, than a year before. They went on falling, or at best holding flat, until 2005.
From 1999 to 2005, how much do you think consumer prices in Japan fell in a typical year?
By less than 1 per cent a year. Even the biggest yearly fall in the period was under 1 per cent, and in 2004 prices barely moved, so the larger options overstate it. What made the falls matter was that they went on year after year.
From the late 1990s Japan had deflation
From the late 1990s Japan had deflation, a fall in prices across the whole economy. Deflation is the general level of prices going down, so that the same amount of yen buys a little more than it did a year before.
Two measures track it. The consumer price index follows the prices households pay for a basket of goods and services, including goods made abroad. The GDP deflator follows the prices of everything produced in Japan, GDP being the value of all of it in a year. That takes in what households buy, but also the machines and buildings firms buy and the goods Japan sells abroad. It leaves out imports, because they are made elsewhere.
Consumer prices fell or held flat every year from 1999 to 2005
The chart shows how much consumer prices changed each year, on figures from the World Bank, an international development lender. Above zero, prices rose on the year before; below zero, they fell. In the early 1990s they were still rising.
From 1999 to 2005 consumer prices fell or held flat every year. They fell most in 2002, by 0.9 per cent, and in 2004 they barely moved. The falls came one after another, so by 2005 consumer prices were about 3 per cent lower than in 1998. The International Monetary Fund (IMF), which advises and lends to its member countries, reported that, on most measures, the pressure pushing prices down had grown stronger through 2000 and early 2001.
Source: World Bank, World Development Indicators (FP.CPI.TOTL.ZG, from IMF International Financial Statistics), data last updated 13 July 2026. CC BY 4.0.