It is shown that Japan experienced a structural break in the inflation from a high-growth period with relatively high inflation to low growth with exceptionally low inflation since the early 1990s. We show based on a stylized accounting model, how funds are created in a country open to international capital flows by domestic savings, credit creation of banks and net capital inflows, being absorbed either by rising asset prices, newly issued bonds or more money being held. Government expenditure financed by government bond purchases of commercial banks is shown to be an important channel of money creation in Japan’s post-bubble period. With the price level being assumed to be dependent on both goods with free market prices and good with prices controlled by the government we show that inflation in Japan has been kept low by mainly three factors directly or indirectly influenced by the Bank of Japan: increased money holding of households and enterprises, central bank-backed debt-financed price controls and net capital outflows.
Download study as PDF (Reading time 45 min)
About the author
Gunther
Schnabl
Gunther Schnabl heads the Flossbach von Storch Research Institute & is a professor at the University of Leipzig. He was an advisor at the European Central Bank and has conducted research at the Universities of Paris 1 Panthéon-Sorbonne, Stanford & Tokyo.
LEGAL NOTICE
One of the purposes of this publication is to serve as advertising material.
The information contained and opinions expressed in this publication reflect the views of Flossbach von Storch at the time of publication and are subject to change without prior notice. Forward-looking statements reflect the judgement and future expectations of Flossbach von Storch. Actual performance and results may, however, differ materially from such expectations. All information has been compiled with care. However, no guarantee is given as to the accuracy and completeness of information and no liability is accepted. The value of any investment can fall as well as rise and you may not get back the amount you invested
This publication does not constitute an offer to sell, purchase or subscribe to securities or other assets. The information and estimates contained herein do not constitute investment, legal and/or tax advice or any other form of recommendation. In particular, this information is not a replacement for suitable investor and product-related advice and, if required, advice from legal and/or tax advisers.
This publication is subject to copyright, trademark and intellectual property rights. The reproduction, distribution, making available for retrieval, or making available online (transfer to other websites) of the publication in whole or in part, in modified or unmodified form is only permitted with the prior written consent of Flossbach von Storch.
Past performance is not a reliable indicator of future performance.
© 2025 Flossbach von Storch. Alle Rechte vorbehalten.