Economic reforms remain important for JapanInterview with Mr. John Lipsky
Published in Nihon Keizai Shimbun
January 7, 2009
This is the English translation of the original Japanese text.
Q. What is your assessment of the global economy ?
A. The global economy continues to show signs of a very sharp slowdown. The continued financial market turmoil has undermined confidence of both consumers and businesses and has lead to a cutback in spending on both consumption and investment.
Most notably, the advanced economies as a group have fallen into recession. This is an unusual event, as it would mark the first time since World War II that these economies will have contracted on an annual basis. We will further lower our forecast in January from the figure that we published in November, probably by a significant margin. In this circumstance economic policy support, especially more fiscal stimulus is needed to support global economic activity.
Q. How about the US economy?
A. A shift away from the relative reliance on consumer demand-led growth is inevitable.
The unexpected acceleration in productivity growth that occurred over a decade ago has ended, and the unanticipated moderation in inflation expectations that has been underway over the past twenty-five years also is reaching an end. thus, expected long-term growth rates will stabilize, as will long-term inflation expectations. In these circumstances, it seems only natural that households will tend to save more out of current income.
Q. Emerging market economies are inevitably affected.
A. The advanced economies' downturn has resulted in a significant weakening of external demand for the products of export-oriented emerging market economies.
In addition, the financial turmoil has substantially slowed capital flows to these economies. Thus, the decoupling that many expected simply has not occurred.
Q. Is there any hope?
A. Helpfully, several of the large emerging economies have the opportunity to strengthen domestic demand growth, by adopting appropriate economic policy initiatives, potentially involving monetary, budget and structural measures.
The policy measures recently announced by the Chinese authorities are consistent with those aims and there may be further efforts in this direction that could be beneficial.
Moreover, major energy-exporting economies will have moved from a point of substantial surplus in 2008 to a dramatically smaller surplus, if any, in 2009.
These two areas, China and other emerging Asian economies and the oil-exporting economies, together will contribute substantially to supporting global growth and hopefully to reducing global imbalances.
Q. Will the dollar sustain the role of key currency?
A. It is not clear how many key currencies will appear eventually, as many factors determine the use of a currency in a given circumstance.
For now, the dollar remains dominant as a reserve currency, and in many other key aspects.
Q. The role of Government seems to increase support of the economy in these circumstances. What do you think about the balance between public and private sector?
A. Governments should avoid taking measures that will be permanent if they might become inappropriate. But there's plenty of opportunity to undertake measures that will make the private sector more effective and efficient in the future.
There will be many challenges in the coming years. But once the immediate crisis is past, there will be a need to clarify the public sector role, especially, with regard to financial institutions, where governments currently are providing large-scale support.
Q. In this financial crisis, a lot of arguments are being made for more regulation. What should be done?
A. The G20 Leaders Summit — that will reconvene in April — will focus on an Action Plan that deal substantially with issues of financial regulation and supervision, as well as other important issues.
The first task is to improve what we call the "perimeter of regulation". As markets changed, the existing definitions of what was regulated, and by whom, became outmoded. As a result, some important risks were built up that were invisible to regulators, and apparently in some cases to the institutions themselves. In other words, some risks that institutions thought they removed from their balance sheet, returned unexpectedly and caused severe problems. Clearly, the perimeter of regulation needs to be drawn more effectively.
Second; Regulations need to take greater account of what we call macro-prudential factors. In general, existing regulations cover individual institutions and their holdings of specific financial instruments, but take no account of the broader economic setting or the condition of the overall financial system.
As a result, it was far to easy to aggressively build up leverage when times were good, while the regulations tend to reinforce deleveraging forces when times turn bad. In other words, the current system tends to act in a pro-cyclical fashion. Reducing that tendency requires adding a macro-prudential focus.
Q. What are your views on the Japanese economy?
A. First; Reform. The movement towards economic reforms and structural reforms were so prominent. This reform initiative regains strength and has impact, continuing impact on improving the performance of the Japanese economy in the coming years. It will be important to see its longer term impact.
Second; Neighborhood economies. Japan is in a very good neighborhood of rapidly-growing economies that have provided important markets for Japanese products and Japanese companies. A trend towards greater domestic demand growth in these large neighboring economies continues or is accelerated. That will undoubtedly provide new opportunities for the Japanese economy.
Third; Demographic situation. The striking demographic situation of Japan with its aging population. Japan has an unusually old population and an aging population surrounded by many neighbors with very young populations. It is important to use the circumstance.