The paper takes issue with a mainstream view according to which the alleged poor performance of the Japanese economy during the 1920s was the result of deflationary macroeconomic policies. There is evidence that government spending was moderately on the deficit side and more so at times of falling aggregate demand. Money supply increased throughout the period. The Bank of Japan followed an 'accommodating' (demand-pulled) loan policy. Price deflation is explained by a model which leads to the prediction that the announcement of a future appreciation of the exchange rate will lead to an immediate decline in the price level followed by a steady downward path until a new steady state is reached. The authors conclude that the inability to deflate was a blessing in disguise, if seen in the perspective both of contemporary international events and of the Japanese policies of 1929-1931. © 1990.