Haunted By The Nikkei

The specter of Japan's most popular stock average,the Nikkei,hovers over the minds of U.S. officials and investors alike.The Nikkei reached its peak of around 40,000 in 1988.For 22 years,it has failed to even get close to that level again.It's only at about 9500 now.Is that to be the fate of Western markets as well following the financial crisis?
James Bullard,President of the Federal Reserve Bank of St.Louis,says deflation is not the main economic scenario for the U.S.All the same,core inflation has drifted below 1%.We're on the low side.The Japanese situation has been very difficult for them to get out of.Mr.Bullard calls for a plan to have significant easing.If the economy continues to recover,we can all forget about it,but a big shock to the economy could cause the Japanese situation here.Japan is a big,industrialized country;they're like us.The Fed's interest rate targeting can create this outcome.Low inflation plus low rates can cause deflation.
The academic community takes this risk seriously.Mr.Bullard is still an inflation hawk,but that's not where we are now.If we promise to stay at 0% rates for 10 years,it's gonna be Japan all over again.At some point,the strategy has to shift.In that situation,deflation,ordinary stabilization methods are shut down.You're in this environment where inflation can be too low,and you have to deal with that.Quantitative easing can work.It's important to do contingency planning for all outcomes,the Federal Reserve Bank President James Bullard believes.