MPC's Adam Posen warns Britain at risk of Japan-style deflation

MPC's Adam Posen warns Britain at risk of Japan-style deflation

Britain is at risk of sliding into a Japan-style episode of deflation, and may be even worse-equipped than the Asian country to escape, a Bank of England policymaker has warned.

By Edmund Conway
Published: 8:45PM BST 24 May 2010

Adam Posen, a member of the Bank's Monetary Policy Committee, said that although Britain and the US were unlikely to face repeated recessions, in many senses their plight was "scarier" than Japan's. The warning is of particular significance because Mr Posen - an American economist - was recruited to the MPC partly because he is a renowned Japan expert.

In speech at the London School of Economics, he said: "The UK worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had."

Britain faces an uncomfortable trio of obstacles, none of which faced Japan in the 1980s or 1990s.

• Unlike Japan, Britain has to sell a large proportion of its debt to overseas investors, who are more likely to exit the market if they become scared of Britain's fiscal prospects. 
• The UK also faces the challenge of having to boost a troubled manufacturing sector if it is to recover sufficiently. 
• Unlike Japan, it does not have the luxury of having a worldwide market with a large and growing appetite for exports.

He also warned that the banking system's continued troubles would undermine companies' abilities to raise funds, and pointed out that businesses already appeared to be hoarding savings - something which happened in Japan.

Using a film analogy, Mr Posen said that it was possible that there could be UK "remake" of the Japanese episode.

"Unfortunately, the ironic twist for this upcoming film is that in some ways the remake might be scarier than the original. That risk arises not only because the original Great Recession was not quite so scary as previously thought on close viewing, but because Japan actually had various resources with which to manage its situation while the UK and other economies are not similarly endowed, even if some Japanese policymakers failed to take advantage of them."

The warning may come as a surprise to some, since last week the Office for National Statistics revealed that the Retail Price Index measure of inflation had risen to an 18-year high of 5.3pc. However, there is a growing number of economists who fear that the current relapse of financial stress could spark a global double-dip recession.

Andrew Roberts, credit strategist at RBS, said last week that the world could be heading for Great Depression II. Albert Edwards of Societe Generale expects some years of deflation, followed by hyperinflation as countries monetise their deficits.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7760827/MPCs-Adam-Posen-warns-Britain-at-risk-of-Japan-style-deflation.html