BRITAIN is at risk of suffering a prolonged Japanese-style recession that may be “scarier than the original,” a member of the Bank of England’s monetary policy committee warned last night.
Adam Posen, who is an expert on Japan, added that he couldn’t rule out the possibility of deflation engulfing the UK?economy, as it infamously did in Japan.
In a speech last night at the London School of Economics about Japan’s lost decade, Posen warned that “the UK worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had”. He noted that the UK is similar to Japan in terms of its vulnerability to financial fragility, unlike most other advanced economies, and its non-financial firms have also been shoring up their balance sheets.
He also pointed to the highly open UK economy compared to relatively closed Japan, which would not only see some of the fiscal stimulus lost overseas but also keeps Britain dependent on growing export markets. For much of the 1990s, Japan benefited from strong growth in both the US and other trading partners in Asia; this is not the case in the Eurozone, the UK’s largest export market.
But he added that Britain’s “more active investors” might still save it from following in the wake of Japan.