The European Central Bank (ECB) must employ a multi-trillion Euro quantitative easing (QE) program to avoid facing the same deflationary fate as Japan, argues Perpetual.
Perpetual head of investment market research Matt Sherwood said the ECB does not have the "policy arsenal" to address deflation.
“Europe is not in a self-sustaining downward spiral yet, but I think they might be closer than what Mario Draghi and other European authorities think, and they appear to be turning Japanese faster than the Japanese did.
“Eurozone deflation is symptomatic of a more general problem that affects the global economy, which is stagnation, and it is time that a multi-trillion Euro QE program is unleashed,” Mr Sherwood said.
Mr Sherwood also said Japan’s experience in the 1990s showed traditional monetary policy instruments are largely ineffective to reverse deflation, with nominal rates at zero as they are “essentially now” in the Eurozone.
“Even unconventional measures implemented last year including negative interest rates, cheap business loans and a limited QE program have not helped.
“[Also] two problems that Europe has, that Japan didn’t, is that their debt is owned abroad and policy debates are considerably more protracted,” he said.
Further commenting on the Eurozone’s deflation, Mr Sherwood indicated that persistent deflation within the region can be damaging to consumers, corporations or governments with excessive debt.
“If falling prices become entrenched wages, consumer spending, earnings and tax revenue all decline, unemployment increases and the ability to service debt wanes.
“That is income declines, but the stock of debt does not and servicing debt becomes more burdensome despite low interest rates.
“In this way, if deflation was to become entrenched it could reignite the European debt crisis,” Mr Sherwood said.