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Japan was unsuccessful in containing deflation for much of the 1990s. Interest rates were maintained near-zero for almost 15 years, with July 2006 marking the first time this policy was abandoned. Only in 2008 did Japan again sustain positive inflation rates.

One of the systemic side-effects of this long period of low interest rates is the so-called carry trade, with investors taking loans at very low interest rates in Japan and investing in higher yielding assets in countries with higher interest rates, typically emerging market economies. The 2008 financial market crisis has resulted in the unravelling of this carry trade, with many of these borrowed and sold yen unravelling causing a huge spike in the value of the yen relative to other currencies.

Systemic reasons for deflation in Japan

• Fallen asset prices. There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary.

• Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. This likewise means the money is not available for lending and therefore economic growth. This means that the savings rate depresses consumption, but does not appear in the economy in an efficient form to spur new investment. People also save by owning real estate, further slowing growth, since it inflates land prices.

• Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods, raw materials (due to lower wages and fast growth in those countries). Thus, prices of imported products are decreasing. Domestic producers must match these prices in order to remain competitive. This decreases prices for many things in the economy, and thus is deflationary.

Investing in a deflationary economy

A period of deflation results in an increase in the burden of debt. Stores of value such as gold or cash are thus best kept out of the markets as their relative value appreciates even without interest income. This is generally a bad thing for the rest of the economy, so it is important to watch for signs that economic and fiscal policy are working to correct this potential downward deflationary spiral

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