Like melting ice caps, or a drunk and disorderly nun, there is something deeply unsettling about the spectacle of money behaving badly. It is a phenomenon we associate with stricken places or remote times - Zimbabwe, with its trillion dollar notes, or Weimar Germany, where shoppers pushed wheelbarrows filled with worthless Reichsmarks.

Hyperinflation, when prices rise uncontrollably, is easy to grasp, if alarming to contemplate. But since last year British money has begun to succumb to a new and unfamiliar malady, a ghostly, stealthy affliction that, in its chilly way, can be just as catastrophic.

The UK Retail Price Index fell to 0.1 per cent yesterday, its lowest in 49 years. This is further confirmation of what many economists regard as inevitable this year - a slide into deflation, when prices shrink over time. The last serious case was the Great Depression, so few people under 80 have any experience of living with deflation. But in the ten years up to 2005, 130 million Japanese did, and so did I. It is a curious and deceptive experience in which one superficially delightful fact - that everything is getting cheaper - numbs you to the crippling damage being suffered by the economy and the country as a whole.

I arrived in Tokyo in 1995 in the understanding that I was moving to the richest and most expensive city in the history of the world. This had been true in the late 1980s, when Japan's bubble economy was at its most inflated, and extravagant stories still circulated about those days.

Someone had calculated that the vast park surrounding the Imperial Palace was worth more as real estate than the entire state of California. It was said that a 10,000-yen note, folded as tight as could be and dropped on to the pavement of central Tokyo, would not be enough to buy the square inch of land it covered. In contrast to the rest of Asia, it was American and European tourists, not the locals, who looked shabby and impoverished. Nervously, I braced myself for life in an inflationary inferno.

By the time I arrived the fires were going out. Much of the bank lending on which the bubble was based, it became clear, would never be repaid. The banks stopped lending and, a decade and half before Europe and the US, Tokyo experienced its own credit crunch. Bankruptcies and restructuring increased, and with them came mass job losses such as the Japanese salaryman had never known before. There was suicide and depression, and neat tent villages of homeless people began to appear in parks and along riverbanks. But for those who kept their jobs, and were not burdened with debt and property - people like me, for example - it was a time of strange, weightless prosperity.

I moved into my present home, a small two-bedroomed flat, in 1999. In the morning I made a 20-minute journey to work on the subway. At lunchtime, I enjoyed a piece of grilled fish and bowl of rice, and in the evening a plate of pasta and a bottle of wine. Once in a while I would drunkenly yodel David Bowie songs in my local karaoke parlour. In ten years, none of these expenses increased significantly, if at all.

My rent today is the same, to the yen, as it was when I moved in. Certain costs positively fell during the decade - including karaoke, golf and the cost of lunch in fast-food restaurants after a vicious price war between McDonald's and its great Japanese competitor, the splendidly named MosBurger.

Apart from an effective freeze on the cost of everyday goods, new areas of retail opened up. “Hundred-yen shops” opened, selling cheap food, drinks, make-up and toys for what was then the equivalent of 50p - bargains in a country formerly famous for its love of top-end luxury. Barbers offered cut-price 1,000-yen haircuts. To one who had grown up with the idea that things get somewhat more expensive - gradually, manageably - over time, to experience the opposite was almost exhilarating. But as fun as it was for people like me, for Japan as a whole it was devastating.

The destruction wrought by deflation is less obvious and dramatic than hyperinflation, but it penetrates deep. The most obvious effect is to reduce household spending. If prices are coming down month by month, why hurry to buy a new iPod, fridge or car? Why not wait until it becomes cheaper still - particularly if the value of your home is falling and you are worried about losing your job?

But if people are not buying, less is made and sold. Shops and factories close and jobs are lost. The value of property falls along with everything else, and borrowers default on their mortgages, threatening lenders. And as the number of people with money shrinks, prices are lowered even farther still in an effort to encourage spending.

Is this the trajectory that Britain faces? Hard times can bring long-term benefits, such as healthier banks and fitter and more efficient companies which, having ridden out the storm, find their competitors destroyed. But a deflationary dive is painfully difficult to pull out of. In Japan's case at least, the problem often seemed to lie not so much in the realm of economic policy-making as in mass psychology.

In the late 1980s Japan was a self-confident and aggressive global player, confidently buying up iconic foreign properties such as the Columbia film studio and the Rockefeller Centre, and threatening to overtake the US as the world's biggest economy. It entered the new millennium in a funk of hesitation and self-doubt from which it still has not recovered.

Deflation is to inflation what hypothermia is to a raging fever. It chills people as well as economies and slows their vital systems. It gets into the heart as well as the head - and cheap noodles, haircuts and karaoke are no consolation at all.

Richard Lloyd Parry is Asia Editor of The Times

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