UK won't follow Japan's example

08:55, May 26, 2010      

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Bank of England policymaker Adam Posen said the UK and US economies are at a "low risk" of following Japan into a so-called lost decade of stagnation even as the threat of deflation remains.

"The UK and US economies are at low risk of turning Japanese in the sense of having recurrent recessions through macroeconomic policy mistakes," Posen said . Still, "we all share some risks and problems in common with Japan circa 1995" and deflation "cannot be ruled out".

Britain's economy probably grew faster than initially estimated in the first quarter as the recovery strengthened, data today may show. Japan's so-called lost decade, which Posen refers to as its "Great Recession", was a period during the 1990s in which the economy slipped in and out of recession and grew at an average rate of about 1 percent a year.

When a "large negative shock" risks a severe economic contraction, central bankers and governments "have to intervene and do so proactively," said Posen, who joined the Bank of England's Monetary Policy Committee last year. "It is impossible to completely offset such negative structural effects, and unfortunately, I believe that there is reason to think they will be larger and more immediate in the UK today than they were in Japan in the 1990s."

The UK "worryingly combines a couple of financial parallels to Japan," which include dependence on a few large banks for sources of credit and a high level of savings amongst companies that may indicate they may be slow to increase investment, Posen said. Also, the UK has "far less room for fiscal action to compensate for them than Japan had".

The policymaker said that while the UK export outlook may benefit from the pound's weakness, foreign sales may be restrained by "poor external demand".

Source:China Daily


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