In his latest Economic outlook, Neil Williams, Senior Economic Adviser to Hermes Investment Management, argues that Japan-style deflation is becoming an increasing possibility elsewhere. While it may not involve a general downturn in living standards – Japan after all remains a prosperous G3, $5trn economy (almost twice the UK’s) – the main challenge would be the shift in mind-set needed to live with it.
After a decade, central banks that are still not getting the inflation they crave are reverting to the tools that failed them. QE’s boost to asset prices has become counter-productive - widening disparities, stuttering demand, and stymying inflation. With central banks scared of their own shadows, the risk to markets therefore comes more from protectionism. The 1930s revealed few winners from a trade war. Stagflationary forces should mean the cost-led inflationary flame snuffs itself out. Helpfully, ultra-cheap borrowing costs are, meanwhile, offering incentives to governments to open the fiscal box.
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