This article reviews the conventional view of deflation, which assumes that deflation is always harmful, and contrasts it with a more nuanced view of deflation, which makes a distinction between deflationary pressures originating from the aggregate demand and the aggregate supply sides of the economy.
Deflation returned as a pressing issue as Japan struggled with its weak economy and falling price level and inflation in many of world's advanced economies declined significantly Between 1995 and 2004, Japan's economy grew an anemic 1.15 percent per year while its price level declined by 0.04 percent per year.
Both the sticky-wage and debt-deflation stories relied on movements in the price level that were unanticipated when contracts were signed, while the interest-rate story is based on expected deflations. This implies that simply summing the three effects will overestimate the net effect.
If G7 central banks fail to deliver a revival, bonds denominated in local currencies in emerging markets will also become good value as recession and deflation will take on more global characteristics.