As a result of the erosion of banks’ intermediation function, Japan’s economy fell into a  BIS central bankers’ speeches  1  situation in which the effects of monetary policy did not sufficiently feed through to the economy. Against the backdrop of these overlapping events, Japan’s economy fell into deflation.
From the 2000s onward, the decline in the labor force due to demographic changes became an additional factor exerting downward pressure on the economy. Since deflation persisted, deflationary expectations became entrenched, and economic behavior based on the assumption that prices would not rise or would moderately decline took hold.