The deflation trap

Deflation, a mix of falling prices and economic slowdown, is a disaster for any economy. Despite a warning several years ago, Korea spent time debating if it is really in a deflationary situation instead of finding effective ways to combat it. The JoongAng Ilbo’s latest survey on 20 analysts shows why that was the wrong approach. Four of them said our economy is in the early stage of deflation and 11 said it runs the risk of deflation. Twelve stressed that it’s time for the government to change its policies and act, not to engage in a leisurely debate.

As deflation is a two-pronged menace to the real economy and economic psyche, preemptive measures are needed on both sides. If the government can’t ease economic players’ jitters, a massive provision of liquidity or a drastic lowering of interest rates ends up going nowhere because deflation thrives on a self-fulfilling prophesy. Korea must learn lessons from the United States - not from Japan - as the former succeeded in controlling deflation while the latter failed, despite the fact that both used the same tool of releasing a massive amount of liquidity into markets. Washington pressed ahead with consistent measures after setting employment and inflation targets, while Tokyo zigzagged between austerity and stimuli measures. The deflation fear, stemming from a critical lack of policy consistency, overwhelmed the Japanese psychology. They didn’t believe their government could pull the economy out of deflation. Our government must convince the people otherwise.

The job calls for changes in the way policy makers think. If they stick to the belief that low prices are good, they can’t avert deflation. The government must consider lowering interest rates by a big margin, or even a Korean equivalent of quantitative easing. Inflation could bring about more benefits than risks given the worldwide deflationary trend.

Considering that real estate accounts for 85 percent of our nation’s total wealth, the property market drives the real economy. If deflation hits that market, there’s no way out. A number of regulations aimed at curbing inflation in real estate prices will only lead to deflation and give heavier financial risks to households than ever before. The market is fed up with the government’s empty slogan of deregulation.

Creating a business-friendly environment through deregulation is also pivotal. But what we need now is an across-the-board structural reform beyond economic boundaries. Non-economic reforms like rational legislation, flexible labor markets and education tailored to the corporate world are also essential. It’s time for comprehensive action.

JoongAng Ilbo, Nov. 21, Page 34