Second, deflation requires that nominal wages fall, or at least expand at a slower pace than productivity, over a protracted period of time. In Japan, labour income per employee dropped considerably over many years, whereas no such board-based development is to be seen in the euro area. Only in Ireland and Greece has compensation per employee fallen markedly to sharply.
Fear of a Japanese scenario is therefore misplaced. Moreover, the notion of Japan’s “lost decades” needs to be seen in perspective. The weakness of growth in Japan is partly a natural consequence of the country’s demographic change, as the working-age population has been shrinking since the mid-1990s.