I'm currently going through a Bitcoin course for developers while studying for Summer of Bitcoin. Well I came across a pretty interesting scenario and I'm wondering what's going to happen if that were to be the case.
Since Bitcoin is by definition, deflationary, because it has a limited supply, it will supposedly have more purchasing power over time (assuming good adoption and acceptance of bitcoin). Bitcoin is limited to 21mil forever. I quote from the course,
Many economists argue that a deflationary economy is a disaster that should be avoided at all costs. That is because in a period of rapid deflation, people tend to hoard money instead of spending it, hoping that prices will fall. Such a phenomenon unfolded during Japan's "Lost Decade," when a complete collapse of demand pushed the currency into a deflationary spiral.
Deflation in bitcoin is not caused by a collapse in demand, but by a predictably constrained supply. Now what would happen if people did start suddenly hoarding? I mean HODL is just a huge meme at this point but what if EVERYONE actually did that? What would things look like then?
Generally a reduction in supply of something of value that is in high demand will drive the price up. Same would happen to Bitcoin when the demand is high while people are holding. They will likely sell/buy higher
But when we talk about Bitcoin being deflationary we are mostly talking about the "periodic" reduction in the number of bitcoins that are produced at the code level,which also means the reduction in supply of bitcoins.
The Japanese example was probably caused by low demand for goods (and services) which were probably high in supply (higher than is needed by the population) or the people decided to spend less money to save more, or were unable to buy what they needed. In that case the supply of goods will be higher than demand and the prices of the goods would fall against the national currency which is in high demand, demand higher than its supply. You don't call that a disaster if prices of things are getting cheaper because people aren't buying things they don't need. Or maybe they decide to start producing those things themselves thereby increasing their supply which consequently makes their prices to decrease. The surplus could be exported (assuming they are of good quality) which can further increase the value of the national currency.
A deflationary Bitcoin due to people producing more than they consume, based on hardwork(with its accompanying proof-of work) is more suitable for Bitcoin, and it's what Bitcoin is built for (Hardwork/PoW). I have seen fools trying that on Cryptos without hardwork/work or without producing much and they will completely fall apart.