Daniel Gros writes:  Central banks throughout the developed world have been overwhelmed by the fear of deflation. They shouldn’t be: The fear is unfounded, and the obsession with it is damaging.

Japan is a poster child for the fear. In 2013, decades of (gently) falling prices prompted the Bank of Japan to embark on an unprecedented monetary offensive. But while headline inflation increased for a while, the factors driving that increase – a competitive depreciation of the yen and a tax increase – did not last long. Now, the country is slipping back into near-deflation – a point that panicked headlines underscore.

Contrary to the impression created by media reports, the Japanese economy is far from moribund. Unemployment has virtually disappeared; the employment rate continues to reach new highs; and disposable income per capita is rising steadily. In fact, even during Japan’s so-called “lost decades,” per capita income grew by as much as it did in the United States and Europe, and the employment rate rose, suggesting that deflation may not be quite as nefarious as central bankers seem to believe.

In the US and Europe, there is also little sign of an economic calamity resulting from central banks’ failure to reach their inflation targets. Growth remains solid, if not spectacular, and employment is rising.

Central banks are focused on consumer prices, which is the wrong target.

Instead, central banks should focus on the rate of revenue increase, measured in nominal GDP growth; that is, after all, what matters for highly indebted governments and enterprises. By this measure, there is no deflation:

Moreover, nominal GDP growth exceeds the long-term interest rate. When, as is usually the case, the long-term interest rate is higher than the GDP growth rate, the wealthy may accumulate wealth faster than the rest of the economy.

One might expect this evidence to compel central bankers to rethink their current concerns about deflation.

Nominal interest rates are at zero, while the broadest price indices are increasing, albeit gently. Given that financing conditions are so favorable, it is not surprising that domestic demand has remained robust, allowing unemployment to return to pre-crisis lows almost everywhere.

The eurozone is the only large developed economy where unemployment remains substantial, and thus the only economy where the case could be made for a downside risk of deflation.

The only reason why unemployment remains high in the eurozone is that the labor-force participation rate has continued to increase throughout the recession; and, indeed, employment is returning to pre-crisis levels. This is the exact opposite of what the deflation hawks warn about.

The evidence is clear. Developed-economy central banks should overcome their irrational fear of a deflationary spiral, and stop trying desperately to stimulate demand. Otherwise, they will find themselves with massively expanded balance sheets, and very little to show for it.