Prolonged deflation a real possibility and challenge in post-Covid world
FOR the best part of the past three decades, central banks have made it their overriding mission to keep inflation in check.
With most of the developed Western world in expansion mode since the mid-1980s and then with China jumping on the easing bandwagon since the mid-1990s, the uppermost concern in the minds of monetary authorities was too much money chasing too few goods - which many should recognise as the classic definition of inflation.
However, containing inflation has not been the worry of all central banks. Indeed the most notable exception has been Japan, where after the bursting of a real estate bubble at the beginning of the 1990s, what followed was many years of anaemic prices and sub-par growth, a period that has come to be known as "Japan's Lost Decade''. Some observers believe that the country - the world's third biggest economy - remains mired in deflation, struggling still to get prices rising again. But Japan's problems aside, what is relevant now is whether the ongoing virus pandemic will unleash a similar wave of falling prices, or a state of "too little money chasing too many goods''. Japan's decades-long battle with deflation no doubt serves as a daunting warning.
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