When East Asia's financial crisis began in July 1997, officials and economists worried that it would cause runaway inflation. Now, they are more concerned about the specter of deepening deflation. Persistent price decreases in Japan, China, South Korea, Taiwan, Hong Kong and Singapore, triggered by too much capacity and too little demand, are depressing manufacturing production and profits. The closure of factories and the loss of jobs as a result of the crisis will make it all the more difficult for economies to grow again quickly.'' Unfinished or unoccupied office blocks, apartment buildings and hotels in East Asian cities are an obvious legacy of the boom that went bust. Less obvious is the slump in demand that is forcing factories to close or lay off workers across the region.
Many banks are unable or unwilling to lend to companies in East Asia because of perceived risks.
In China, where industry is plagued by stockpiles of unsold goods, retail prices have dropped for the past 14 months. Other economists expect consumer prices in Singapore to drop as much as 1 percent in 1999, the second successive year of deflation. The official consumer price index declined 0.3 percent in 1998, crimping profits as companies were unable to raise prices. For some countries in East Asia, such as Indonesia and Thailand, the fall in inflation is welcome. For others, modest deflation may be tolerable.