## "Global Prospects and Policy Challenges" by Deputy Managing Director Shinohara's Speech at the Japan Society, New York

_IMF News, April 25, 2013_

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## Bibliographic details
- Published: April 25, 2013

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### Global Economic Prospects
- World growth is expected to reach 3.3 percent in 2013, and 4 percent in 2014.
- Recovery characterized as a “three-speed” global recovery:
  - Emerging and developing economies: leading recovery; accounting for three-quarters of global growth over the past half decade.
  - Countries on the mend: e.g., the U.S.
  - Countries with distance to travel: the Euro Area and Japan.
- Regional growth projections and developments:
  - Developing Asia projected to grow at 7.1 percent in 2013.
  - Sub-Saharan Africa projected to grow at 5.6 percent in 2013.
  - Middle East and North Africa face challenges tied to political transitions after the Arab Spring.
- Financial conditions and risks:
  - Bank credit increased by 13 percent in Latin America over the past year.
  - Bank credit increased by 11 percent in Asia over the past year.
  - Corporations in emerging markets taking on more debt and foreign exchange exposure.
- Low-income and frontier economies:
  - Higher growth since 2008 than pre-crisis years, aided by high commodities prices, investment flows from emerging market countries, good harvests, rising domestic demand, and improved governance.
- Advanced economies:
  - U.S. modest recovery: about 2 percent in 2013 and 3 percent in 2014.
    - Achieved despite strong fiscal consolidation equivalent to about 1.8 percent of GDP.
    - Budget sequester results in too much short-term fiscal consolidation; credible medium-term roadmap lacking.
  - Euro area: forecasted mild contraction of one-quarter of a percent this year.
    - Germany forecasted to grow 0.6 percent this year.
    - France’s growth slightly negative this year.
    - Spain and Italy to experience substantial contractions.
    - Across the European periphery, credit has contracted by 5 percent since the onset of the crisis; unemployment in some countries exceeds 20 percent.
- Japan:
  - New three-pronged approach: higher inflation target and more aggressive quantitative easing, flexible fiscal policy, structural reforms.
  - Immediate actions: 2 percent inflation target; fiscal stimulus of about 1½ percent of GDP over two years.
  - IMF forecast for Japan: 1.6 percent growth this year.
  - Concern: very high public debt — fiscal stimulus without medium-term consolidation risks investor risk premia and unsustainable debt.

### Global Policy Challenges
- Rebalancing global demand:
  - Address imbalances between large current-account surplus countries and deficit countries (example: more investment in Germany and more consumption in China).
- Financial sector reform:
  - Need to complete reform agenda: more stringent capital and liquidity requirements, capital surcharges for global banks, clearer standards of supervision and resolution.
  - Remaining issues: oversight of banks considered “too big to fail,” inadequate supervision of derivatives markets and shadow banking, uneven progress across countries.
- Jobs and equity:
  - Urgent priority due to disproportionate human cost of the crisis on young people.
  - Job creation best achieved through growth and supportive labor market policies.

### National Challenges and Policy Recommendations
- Emerging market and low-income economies:
  - Main challenges: weak demand from traditional markets and rapid increase in global liquidity leading to capital inflows and exchange rate pressure.
  - Recommended actions:
    - Rebuild fiscal buffers depleted by demand-boosting measures.
    - Strengthen financial regulation and supervision; apply macroprudential policy to manage volatile capital flows.
    - Reform expensive subsidies (notably energy subsidies) to direct limited resources to infrastructure and targeted social programs.
- United States:
  - Imperative to raise the federal debt ceiling without doubt.
  - Need for an agreement on a credible, medium-term fiscal roadmap.
  - U.S. debt reduction via entitlement and tax reform.
  - Monetary stance appropriate but may be overburdened and generating adverse spillovers.
  - Exit from unconventional monetary policies poses risks: long-term bond rates could overshoot or capital could suddenly move out of emerging markets.
  - IMF will continue to engage on exit policy options and analyze spillovers.
- Euro area:
  - Monetary policy should remain accommodative; fiscal consolidation should be calibrated country-by-country.
  - Countries with fiscal space should increase spending to strengthen demand; those tightening should protect the vulnerable.
  - Urgent tasks:
    - Fix banking systems by prompting banks to repair balance sheets.
    - Implement structural reforms to rebuild competitiveness.
  - Collective solutions needed:
    - Bank recapitalization through the European Stability Mechanism.
    - A real banking union adding a single resolution authority to the supervisory authority, and a deposit insurance fund.
    - Greater fiscal integration.
    - Consider development of new credit instruments for nonfinancial enterprises (e.g., securitized lending for small and medium-sized businesses).
- Japan:
  - Bank of Japan’s easing framework aimed at achieving 2 percent inflation over the next two years; monetary policy alone insufficient.
  - Complementary fiscal and structural reforms required.
  - Fiscal risks: without credible fiscal and growth plans, aggressive monetary easing could focus market concerns on deficit financing and trigger a sudden rise in interest rates.
  - Importance of growth and fiscal strategies the government plans to announce this summer being ambitious and credible.
  - Specific policy recommendations:
    - Confirm consumption tax increases planned for 2014 and 2015, with the single rate structure intact.
    - Carry out labor market measures to spur employment—especially of women.
    - Deregulate product and service sectors to increase productivity.
    - Financial sector reforms to encourage investment in new and innovative sectors.
  - Japan’s decision to enter Trans Pacific Partnership negotiations signals willingness to enact growth-boosting reforms.
  - Concerns about spillovers from BOJ policy (sudden capital flows, competitive devaluations) may be exaggerated if Japan pursues a comprehensive package of fiscal, monetary, and structural reforms.

### Conclusion
- Restoring global growth and stability requires collective government action.
- The international community must remain focused on building a framework for a new era of growth and stability, continuing the unprecedented collaboration seen at the height of the crisis.

*Deputy Managing Director Naoyuki Shinohara, "Global Prospects and Policy Challenges," Japan Society, New York, April 25, 2013.*

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## References

- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Naoyuki Shinohara](https://www.imf.org/external/np/omd/bios/ns.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp042513b_