Asia is slow to grasp the looming threat of deflation

After months of preaching monetary discipline to fend off inflation, Raghuram Rajan shocked India on Thursday by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%. Close observers shouldn’t have been surprised. India’s central banker, who famously predicted the 2008 global crisis, warned in an op-ed on Wednesday that several of the world’s major economies were “flirting with deflation”, with dire implications for emerging markets like his. The threat of global “secular stagnation” — combined with lower prices in India — no doubt prompted him to act.

The question is why Mr Rajan’s peers across the region don’t appear to appreciate the danger. Just today, South Korea’s central bank courted its own deflationary funk by holding benchmark interest rates steady at 2%, even as consumer prices advance at the slowest pace since 1999.

While energy costs in Indonesia are rising due to the lifting of fuel subsidies, economist Daniel Wilson of Australia & New Zealand Banking Group warns that prices overall are set to slow or fall: “Disinflation synchronisation is in sight and it will be severe,” he says. From Beijing to Bangkok, Asian central banks seem too blinded by longstanding inflation fears to recognise the trends inexorably pushing prices downward.

In a world of plunging commodity prices and weakening global demand, Asian economies that have traditionally depended on exports are going to have to do all they can to gin up growth. Since most of the tools available to governments — increasing spending, lowering trade barriers, loosening labour markets — can’t have an immediate impact, the burden falls on central banks to act. That’s the only sure way to ease strains in credit markets, relieve hard-pressed borrowers and boost investments.

So why aren’t they? An overly doctrinaire fear of inflation explains much of the reluctance. Take the Philippines, where consumer prices are rising just 2.7% and the economy is growing 5.3%. On Dec. 12, central bank governor Amando Tetangco said cheaper oil gave him “some scope” to leave interest rates unchanged. Since then, Brent crude has fallen to about $48 (1,566 baht) a barrel, the World Bank has downgraded its 2015 global growth forecast to 3% from 3.4% and Europe has neared a new crisis. Last week, the Philippine government sold $2 billion of 25-year debt at a record-low yield of 3.95%. Markets aren’t always right, but it sure seems time for Mr Tetangco to move the benchmark rate below 4%.

Another reason: bad memories of 1997. Back then, ultraloose monetary policies helped spark the Asian crisis. In the years since, governments have amassed foreign-exchange reserves — just 10 Asian economies hold more than $7 trillion — and central bankers have maintained conservative rate regimes. Such prudence is understandable given worries about the Federal Reserve tightening too fast, the euro crashing or China’s shadow-banking system imploding. Easing would mean forsaking two decades of economic doctrine preached by Western governments and organisations such as the International Monetary Fund (IMF). But Asia faces a fundamentally different world now, characterised by what IMF head Christine Lagarde calls a “new mediocre”. Developed nations aren’t bouncing back from 2008 as hoped. Governments from Washington to Tokyo are being whipsawed by the fiscal-austerityversus-stimulus debate.

The deflationary forces coursing around the globe have rendered Asian economies less vulnerable to inflation than in 1997. And while much more needs to be done, upgrades to financial sectors and improvements in infrastructure and general efficiency make the region’s economies a bit less prone to upward price bursts.

The real threat has changed. As Japan has shown and Europe may soon discover, deflation can be a lot harder to defeat than inflation. In his op-ed, Mr Rajan lamented the “palpable sense of gloom in the developed world, a feeling that growth is unlikely to take off in the foreseeable future”. He’s right that major economies need to do much more to shake off that pessimism. His counterparts in Asia, though, need to act far more boldly as well.

The question is why Mr Rajan’s peers across the region don’t appear to appreciate the danger.