Amid the situation of prices not increasing, the holding of cash or deposits became a better investment, and thus firms and households hoarded cash and did not make other productive investments. Persistent deflation encouraged behavior to stay status quo, and this deprived Japan’s economy of vitality.
There were phases of economic recovery in the meantime, but they did not lead to a sustainable increase in prices. The Phillips curve, which shows the relationship between the output gap and inflation, shifted downward in tandem with a decline in inflation expectations.