The big powers of the day cut interest rates this week to avoid another Great Depression. Joining the Federal Reserve, European Central Bank, Bank of England and Bank of Canada was the People’s Bank of China.

On Thursday, South Korea, Taiwan and Hong Kong also got into the act, trimming interest rates. All Japan, which pretty much has nothing to cut, could do was pump 2 trillion yen (about Rs98,000 crore) into the financial system.

What can be made of this flurry of Asian activity? Two things come to mind. One, the inflation concerns that dominated the region just a few months ago are swinging towards deflation. Two, the balance of economic power in Asia is shifting faster than many observers expected.

The spreading financial panic is leading to a realization of how vulnerable these countries are. As the $14 trillion (Rs682 trillion) US economy slows, it will take much of Asia with it. Asia is highly dependent on the spending patterns of Americans who have yet to feel the fallout from the global credit crisis.

The coming recession will change that, and fast. Hence China’s move to cut its key rate 0.27 percentage point, the second reduction in a month. Bank of Korea and Taiwan’s central bank lowered their rates by a quarter of a percentage point and Hong Kong cut its benchmark to 2%. Those moves followed the Reserve Bank of Australia’s biggest rate cut since a recession in 1992.

The aggressiveness of Australia’s one percentage point cut to 6% was a surprise to just about everyone except Rory Robertson, an economist at Macquarie Group Ltd in Sydney, who predicted a bigger-than-consensus action.

With unemployment heading higher, oil prices coming down, wage and price pressures subsiding, US consumer-price inflation is “set to collapse over the coming year, from about 5.5% at present to maybe 1% or less", Robertson says. “Within a year, US discussions will again have turned to the growing risk of deflation."

Not everyone agrees, least of all Aaron Smith, managing director of Superfund Financial Singapore. Smith’s concern isn’t so much the US’ $700 billion bailout of the credit markets, but the Fed’s historic efforts to pump liquidity into the economy.

“The commodity that may do the best is cotton," Smith says. “Why? US dollars are made of cotton, and Ben Bernanke has been printing dollars like crazy."

By slashing rates to 1.5%, Fed chairman Bernanke is bringing the “Greenspan put" to new levels of monetary irresponsibility, Smith says. The reference here is to the tendency of Bernanke’s predecessor, Alan Greenspan, to rescue markets and investors with lower rates when things got dicey.

Now that the Fed’s printing presses are running around the clock, Smith says inflation is set to surge. As a result, he expects the price of gold to rise to $1,500 an ounce over the next two-three years from about $890 today.

For now, though, deflation concerns are taking centre stage in Asia. In Tokyo, for example, a precipitous decline this week in the Nikkei 225 Stock Average and movements in prices of government bonds adjusted for inflation “bred nervousness over Japan’s potential return to a deflationary environment", says Naomi Fink, senior currency analyst with Bank of Tokyo-Mitsubishi UFJ Ltd in Tokyo.

Even so, Bank of Japan left its 0.5% overnight lending rate unchanged this week, a decision that speaks volumes about Japan’s waning influence in Asia.

At $4.4 trillion, Japan’s economy is still by far Asia’s biggest. Yet, the sight of China cutting rates within minutes of the Fed and other major central banks while Japan stood still was weighted with symbolism.

The rate cut showed how concerned officials in Beijing are that troubles in the US will jeopardize China’s 10% growth. It also reflected an economy that’s becoming more and more integrated into the global financial system.

Anything China does to continue expanding will be appreciated in Asia, which needs growth engines. It will be easier said than done, though, if US consumers, shackled with debt and falling home prices, enter into a long period of austerity.

Japan’s prospects aren’t much brighter. Bank of Japan has little room to boost growth with interest rates, and the government’s massive debt load will limit fiscal stimulus options.

That’s the short-term concern. The long-term one is that every day Japan’s leaders spend stabilizing growth, they’re not focused on boosting entrepreneurship and tackling the nation’s rapidly ageing population. The return of deflation won’t help to get Japan’s aggressive savers to spend more.

Not all Asian economies see deflation as a threat. Indonesia’s central bank on 7 October raised its policy rate to 9.5% from 9.25% to slow inflation and boost the rupiah after stocks plunged 10% a day earlier.

For many economies, though, the concern is that the worst financial crisis since the 1930s will hurt Asia. Central bankers aren’t taking any chances, and further rate cuts are likely.

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