This could have serious implications for the Japanese economy, which has the closest trade links with the rest of Asia. But the impact on America and Europe will probably be modest. If the region s financial headaches get worse, with a widespread collapse of banks and a deep recession spreading to China and Japan, then the effects on America and Europe would be much more serious. But for the moment, such fears are overdone. Much of the current debate about deflation reflects a misunderstanding about what the phenomenon really is.
Deflation is a persistent fall in the general price level.
If some prices fall because of cheaper imports from Asia, say, this is not deflation, but simply a change in relative prices. It is monetary policy that determines general inflation or deflation, not structural factors such as global competition. If supply did seriously exceed demand, central banks should simply cut interest rates. This is where the Fed went horribly wrong after the stockmarket crash in 1929, when it raised interest rates and allowed the money supply to shrink. But America is not suffering from insufficient demand or tight money.