Analysis
by Andrew Walker BBC Economics correspondent

There is a new worry nagging at the minds of economic policy makers in the West - deflation, or falling prices.

It is one ingredient in Japan's decade of stagnation, as it was in the Great Depression of the 1930s.

Kenneth Rogoff: The West has learned from Japan

Now some economists are worried that it might spread to the West.

Already many businesses are under pressure to reduce prices.

The phenomenon is plainest in retailing and manufacturing sectors.

Take Pittards, a producer of upmarket leather for clothing, footwear and sports goods makers.

Managing director John Pittard says the company has tried to resist pricing pressure through developing new types of leathers.

Even so, he has had to reduce more of his prices than he would have liked.

Fierce competition

Retailing is also a fiercely competitive environment.

David Roth, director of marketing at UK home improvement chain B&Q, says his stores have also been cutting prices.

Cuts have been offset in part by falling world prices, and through gaining efficiencies from suppliers.

The context of low general inflation has made customers much more sensitive to price changes, Mr Roth adds.

Debt problems

Such observations illustrate the tough pricing environment that businesses in many countries have to cope with.

But genuine deflation - a general fall in the price level - has yet to appear.

It has arrived in Japan, where the price of goods and services has fallen by an average of 0.8% a year since 1994.

But why is deflation such a danger?

Debt danger

Stephen King, chief economist at HSBC says the problem revolves about debt.

Milton Friedman: Advocated money printing cure

When people and businesses borrow money, they think about what interest rate they are going to have to pay, and how much income they will have to repay the debt from.

If their income falls, which is more likely when there is deflation, they have less money to make repayments with.

Yet the size of their debts does not fall, along with prices and wages.

And if people do get extra earnings, their inclination is to use it to repay debt rather than buy a new fridge.

As Mr King puts it, spending financed by debt yesterday leads to a lack of spending today because people are trying to pay off debt.

Stock market crash

If they fall earlier decisions to borrow money to finance spending do not look so clever, Mr King says.

Indeed, deflation can have its roots in the aftermath of an asset price bubble.

Deflation also makes business planning more complicated.

In a context of deflation, the efficiency gains won from business investment need to be greater to justify the spending, Mr Roth says.

Worldwide fears

How likely is it that this problem will spread to the West?

Mr King rates the risk of Western deflation as 15-20% - unlikely, yet significant enough to be a real worry.

Kenneth Rogoff, chief economist at the International Monetary Fund, says there is not a high likelihood of deflation spreading.

The US and Europe have learned from Japan's experience, and are probably acting more aggressively than they would have done to avert the danger.

Policy choices

The job of seeing off deflation is regarded principally as one for central banks.

Their first step is to cut interest rates, reducing the cost of paying off debts and making it cheaper to borrow money - money with which consumers can spend, and businesses invest.

But in Japan, interest rates are already practically zero.

So is there any more the country's central bank can do?

Bank troubles

Milton Friedman, who won the Nobel Prize in part for his work on prices, says that every central banker knows how to cure deflation - by printing money.

The idea is that if there is more money in circulation, people will spend more.

But Stephen King argues that this link only works if the commercial banks play their part.

In Japan, central bank efforts have been thwarted by the weakness of the country's commercial banks.

Deflation has contributed to their burden of bad debts - money owed by businesses unable to meet repayments.

That makes banks reluctant to expand lending, and companies reluctant to borrow more.

Fears of hyper-inflation

In any event, the Bank of Japan has been reluctant to print money - there are risks.

Seijiro Takeshita, of Mizuho Bank says there is a danger of setting off hyperinflation, which would put at risk 1,400 trillion yen (�7,290bn $11,300bn) of Japanese people's savings.

But Kenneth Rogoff believes the risks are not so great.

The Bank of Japan's anti-inflation credibility is well established. he says.

If inflation were to overshoot, it would be a transitory problem.

So the Bank has done too little to counter deflation. There is still a need to do something dramatic.

And as Japan's deflation continues, to the risk of it spreading to the West has become significantly higher.

You can hear Andrew Walker's Analysis programme on deflation on BBC World Service Radio at the following times (all in GMT): In Europe: Thursday 24 October at 1630, Friday 25 October 0345, 0745 Middle East: Thursday 1945, Friday 0345 South Asia: Thursday 1845, 1945, Friday 0345, 0745 East Asia: Thursday 1630, Friday 0045, 0945 Americas: Thursday 1630, 1830, 2245, Fri 0345, 0745, 0945 West Africa: Thursday 1845 East and South Africa: Friday 1030