Curbing fears of deflation

The world has stepped up measures to counter protracted slumps in economies amid widening concerns about deflation. Japan announced an expansion of its quantitative easing policy, or bond purchasing, to swell the monetary base by around 80 trillion yen ($678 billion) each year, up from the current 60 trillion yen to 70 trillion yen. The Bank of China also delivered a surprise interest rate cut on Friday, the first in about two years. European Central Bank head Mario Draghi said the bank could expand its asset purchase program or other aggressive measures to ensure the eurozone does not slip into a new crisis. The world is waging a war to keep deflationary pressure at bay.

All major economies except the United States are conducting unprecedented quantitative easing and rate cuts to pump up liquidity in the wake of the 2008 financial crisis, although that could trigger currency wars that strain international relations. Artificial liquidity injections to bolster local economies could devalue rival currencies. South Korea has few options in a currency battle. The won can weaken from interest rate cuts or liquidity expansion, but such moves can trigger capital flight. More clever and precise macroeconomic strategies are needed at times of volatility in our external environment.

During a seminar with heads of economic institutions, Choi Kyung-hwan, deputy prime minister for the economy, said there was a bottleneck in capital flows because despite a surge in liquidity, money has no place to go for good returns. He said the financial, labor and education sectors should be liberalized further to attract capital. In other words, he was prescribing structural reforms. He is right in the long run.

But he must fight a new breed of immediate dangers - depression and deflationary risks. The government must come up with specific policy countermeasures. Short-term and long-term policies must be skillfully blended. Theory does not help that much during times of crisis. What we need is a winning strategy.

JoongAng Ilbo, Nov. 24, Page 30