Why is deflation considered unfavourable and how did it affect the Japanese economy?

Question

Why is deflation considered unfavourable and how did it affect the Japanese economy?

Answer 1

Deflation. You owe more on your house than it is worth. The impulse is to "walk away". All your stuff is worthless. Why pay on the loan?

The Bank of Japan lowered interest rates to zero but no one would buy any thing because it would become worthless. Currency traders manipulated their currency by borrowing from Japanese Banks at 0% interest and depositing it in foreign banks that paid interest.

Answer 2

Deflation = Too Few Dollars Chasing Too Many Goods.

Aside from the Central Bank cutting the money supply, deflation is usually caused by a tightening of credit. In Japan when the banks failed from bad loans, nobody was lending money. The Central Bank dropped rates to 0%, but people still didn't borrow money because the prices on everything was falling like a rock. Who in their right mind would borrow $100,000 for a house even at 0% interest when it might be $50,000 next year?

This is what is happening in the US Real Estate market right now and so far hasn't spread elsewhere. As such, its keeping buyers on the sidelines and banks are restricting credit because they got burned on bad loans. A self defeating cycle that can be hard to break.  Lucky this time the Fed is working late to try and stabilize the problem. But while they focus on credit markets, Inflation is getting out of control. A 30/yr Jumbo Loan is around 8% now. A year or two ago it was around 6%.