The problem with persistent deflation is that it gives rise to a vicious cycle in which firms and households – since they expect prices to fall further and due to heightened uncertainty – postpone various expenditures, which further prolongs weak growth and deflation.
Under such circumstances, with falling prices and heightened uncertainty, postponing expenditures may be the optimal response for individual economic entities; however, from a macroeconomic perspective, it is a typical example of the “fallacy of composition,” since it results in prolonging weak growth and deflation. Therefore, to overcome deflation, it is absolutely essential to drastically convert the deflationary mindset.