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Japan’s Deflationary Hangover: Wage Stagnation and the Syndrome of the Ever-Weaker Yen Ronald I. McKinnon August 2007 ADB Institute Discussion Paper No. 74 Ronald I. McKinnon is William Eberle D. Professor of Economics at Stanford University, Stanford California. The author thanks Dennis Kuo and Brian Lee for excellent research assistance. The views expressed in this paper are the views of the author and do not necessarily reflect the view or policies of ADBI nor Asian Development Bank. Names of countries or economies mentioned are chosen by the author, in the exercise of his academic freedom, and the Institute is in no way responsible for such usage. ADBI’s discussion papers reflect initial ideas on a topic, and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each discussion paper (given in the citation below). Some discussion papers may develop into research papers or other forms of publication. Suggested citation: McKinnon, Ronald I. 2007. Japan’s Deflationary Hangover: Wage Stagnation and the Syndrome of the Ever-Weaker Yen. Tokyo: Asian Development Bank Institute. Available: /discussion- paper/2007/08/20/2345.exchange.rate.stabilization.yen/ Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: E-mail: info@ © 2007 Asian Development Bank Institute ADBI Discussion Paper 74 Ronald I. McKinnon Abstract Japan still suffers a deflationary hangover from the great episodic yen appreciations of the 1980s into the mid-1990s. Money