Japan's economic slump could accelerate into a depression deeper than anything seen since the early 1930's, a leading US economist warned today.
Paul Krugman, professor of economics and international affairs at Princeton University, said he was concerned an expected steep fall in Japanese output and prices would send the country into a severe downturn which would be worse than just a recession.
Japan was running out of options, Mr Krugman told journalists on the sidelines of the Pacific Economic Cooperation Council (PECC) conference in Hong Kong.
"The structural reform is not going to happen quickly enough to solve what now looks like the beginning of a deflationary spiral," he said, referring to the government's tardiness in implementing promised economic reforms.
"I don't know how fast it can go, but we're looking at a scenario that looks more like 1931 than anything we've seen in the post-war period," he added, referring to the depression of the early 1930s.
"You worry about a downward spiral where the declining economy and accelerating deflation feed on each other."
Krugman said Japan's gross domestic product (GDP) deflator was falling at 2 per cent a year, meaning real interest rates were not very low despite nominal rates near zero.
The country also had to contend with a rising real burden of debt due to deflation.
"It's a scenario that we haven't seen for about 70 years in the world... and (there are) very few precedents to know how bad it is," Mr Krugman warned.
"You have to ask if it is possible for Japan to have a really steep recession... not (GDP contraction of) minus one or two (per cent) but several times that (and) it certainly looks possible now.
"We're in unchartered territory... almost literally within living memory, we've never seen this kind of a slump so we don't know what it looks like."
Mr Krugman said there was little the Japanese government could do to lessen the impact of such a downturn, but added it was likely Tokyo would adopt a drastically weaker yen policy within a year if the economy deteriorated sharply.
"But I'm not sure it'll come in time to stop the process."
The world's number two economy shrank 0.7 per cent in the three months to June and most economic figures indicate a further contraction occurred in the September quarter, indicating Japan had fallen back into recession.
The country's jobless rate hit a post-war high of 5.3 per cent in September.
Mr Krugman said the effects of the deteriorating Japanese economy and the current information technology (IT) slump have had an huge impact on some Asian economies but added he believed Japan's woes were not a crisis for the entire Asian region.
"There's been a severe immediate hit to a couple of Asian economies, like Singapore, which were very heavily dependent on IT. They happen to be specialised in exporting exactly the kind of goods for which demand has collapsed in the US and elsewhere.
"I don't think this is a financial crisis. I think there's a Japanese crisis and then there's an IT crisis and those things spill over."
The PECC, founded in 1980 and with a current membership of 25 countries, is a non-governmental regional economic forum.
AFP