Japanese export firms dealt with the severe competition coming from low-cost emerging countries by cutting costs – that is, cutting wages and delivery prices. This had a spillover effect on the non-manufacturing and public sectors in Japan, resulting in a fall in the general price level. This led to an appreciation of the Japanese yen through the purchasing power parity (PPP) mechanism.
As this currency appreciation partly offsets the effects of initial cost cuts by export firms, the whole cycle starts once again, beginning with cost cuts by firms. Deflation persists in that process. 2  See Reinhart and Rogoff (2012) and IMF (2009). 3  The impact of population ageing is multifaceted.