A deflationary spiral can develop for various reasons but the background common to all is that various contracts for economic transactions are mostly agreed at a fixed nominal value which cannot be adjusted flexibly for price declines. I will explain this focusing on three economic variables: interest rates, debts, and wages.
The first point concerns interest rates, the so-called “zero interest rate constraint.” Currently, not all the market interest rates are zero, but short-term rates, which the Bank can control through its policy, are virtually zero and cannot decline further.