Japan Times reports:

Consumer prices excluding fresh food fell 0.1 percent in August from a year earlier, the first drop since April 2013, the same month Kuroda embarked on a campaign of record asset purchases to rid Japan of its “deflationary mindset.”

My goodness is economics a difficult subject. (Scott Sumner is implicitly surprised too.) So why is this happening?

Many of you might be tempted to utter some version of the words “liquidity trap.” Even if this is one of the more reasonable versions of the liquidity trap arguments, there remains a problem.

Liquidity trap arguments imply that someone’s marginal utility of holding money is basically flat, whether that be the banks, the bank shareholders, the customers — someone. And the flatness holds for a bunch of relevant someones, not just a few people. (Or is that a flat marginal utility curve for “money plus safe short-term bonds“? Whatever.) With a flat marginal utility curve of money there are multiple equilibria, just as multiple equilibria more generally plague liquidity trap models. Velocity could be something other than what it is, because at higher or lower levels of cash balance holdings the rate of return on those holdings still would be the same.

Institutional frictions may play a role in setting the equilibrium. So why an equilibrium with falling prices? Prices are sticky to some extent, which tends to militate against those of the multiple equilibria where prices are falling. One might expect the equilibrium where the aggregate of prices rises, if only slowly. But then why would a slightly higher rate of price inflation turn back down to a lower rate?

A second view is that the money supply/credit supply is endogenous, a’ la Fischer Black, Basil Moore, and others. Until the real economy does better, the force of M times V will be weak. This view involves no particular commitment to the slope of the marginal utility of money schedule. Post 2013, prices went up for a while, because people thought Abenomics might work, but now that they see it doesn’t prices are sliding back down again.

Yet a third view is that the Japanese simply haven’t tried hard enough yet to debase their currency, see for instance Krugman on credibility or various Scott Sumner posts. In this context I would myself cite gerontocracy rather than credibility issues.

My best guess is that some version of #3 makes #2 true at the relevant margin, but I don’t think such matters are well understood.

Addendum: Scott Sumner comments, for any plausible measurement I still say the rate of price inflation is relatively low in a puzzling manner, relative to asset purchases. Large increases in money are in principle capable of offsetting relative small declines in food and energy prices, and if they do not that is simply another way of restating the puzzle.