Deflation rears its head in Asia<\/p>\n
Alan Wheatley, Reuters, Tokyo<\/p>\n
The spectre of deflation is haunting Asia, bringing the risk
\nof further pain to a region struggling with one of the steepest
\neconomic downturns on record.<\/p>\n
Economists said the unfolding shock to global demand, coupled
\nwith a flood of goods from low-cost China, was putting heavy
\ndownward pressure on prices and could pose serious policy
\nchallenges if the trend persisted.<\/p>\n
\"It could cause a lot of problems. You just need to look at
\nJapan. It could cause banking systems to become more fragile,
\nborrowers to suffer even more as their debts get larger and make
\nlife difficult for policy makers, too,\" said Rob Subbaraman of
\nLehman Bothers in Tokyo.<\/p>\n
The danger of deflation has come into focus after China and
\nTaiwan both suffered an outright year-on-year decline in consumer
\nprices in September.<\/p>\n
They joined Hong Kong, which has experienced 35 straight
\nmonths of falling prices because of its fixed exchange rate,
\nwhich forces domestic prices to decline to retain
\ncompetitiveness.<\/p>\n
Demand has taken such a hit, driving down the price of
\neverything from oil to computer chips, that Subbaraman saw a risk
\nof deflation spreading beyond Greater China.<\/p>\n
In Singapore, for instance, year-on-year consumer price
\ninflation slowed to 0.8 percent in the third quarter from 1.7
\npercent in the second and is officially forecast to fall to less
\nthan 0.5 percent this quarter. Wholesale prices in September fell
\n1.4 percent.<\/p>\n
The slide in Asian inflation contrasts with a surge in prices
\nduring the last recession in 1997\/98. That was because fixed
\nexchange rates had collapsed during the 1997 financial crisis,
\nsending currencies into an inflationary tailspin.<\/p>\n
Another structural factor weighing on prices is the inexorable
\nrise of China as the world's lowest-cost producer in most
\nsectors, robbing its competitors of pricing power.<\/p>\n
Andy Xie of Morgan Stanley in Hong Kong said deflationary
\npressure was particularly acute in manufacturing, where assembly
\ncompanies that have set up shop in China are now pressing their
\nsuppliers to follow them.<\/p>\n
\"As layers of component manufacturers move to China, Chinese
\nlabor costs work through the whole value chain and can ultimately
\nbring prices down by one third or more for a large number of
\nproducts that are traded in the world today,\" Xie said in a
\nrecent report.<\/p>\n
With rapid urbanization likely to keep a lid on China's labor
\ncosts, and the home market unable to absorb its growing output,
\nVincent Chan of UBS Warburg in Hong Kong said he expected China
\nto continue to export deflation.<\/p>\n
\"China's exports have been holding down world inflationary
\npressure, and I think that's going to last a long period of
\ntime,\" he said.<\/p>\n
Low, stable inflation is good for growth because it gives
\ninvestors confidence to make long-term commitments.<\/p>\n
But broad, sustained price falls are a curse: consumers are
\ntempted to postpone purchases knowing prices will get cheaper;
\nborrowers have to sell or earn more to repay their debts; and
\ndeclining asset prices stifle loan growth and economic activity,
\nlocking the economy into a vicious cycle of debt deflation.<\/p>",
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