COVERLEAD

COVER LEAD
Mid-Term Prospects for the Global Economy －Where Is It Heading in the Midst of Structural
Change & Geopolitical Crisis?
By Naoyuki Haraoka
We are living in an era of economic transition. This is a worldwide
phenomenon. The causes of this transition may vary, depending onregion or country, but there are common factors lying in the stream ofchanges among the nations. One is structural transformation of theeconomy during the long recession following the global financial crisis
in 2008. While the manufacturing sector has been struggling to achieve
rationalization and enhanced productivity, the financial sector has been
losing its vigor to drive a whole economy. With the rise of the Fourth
Industrial Revolution, IT is increasing its weight and influence in theeconomy and thus services related to computer software are increasing
their share in the industrial structure. Though innovation will create new
business opportunities, the manufacturing industry does not know yet
how to apply those new technologies to business and enhance
productivity. Thus, innovation has not yet brought a fruitful outcome.
Meanwhile, the financial crisis has taught us that the market can fail toachieve the best resource allocation, contrary to what standard economic
textbooks tell us. Most governments today are trying to replace market
functions to raise their economic growth rate, still considered the best
barometer of a national economy’s performance. So-called growthstrategy has become a common economic policy these days all over theworld, though not necessarily having been so successful anywhere.
Whether successful or not, governments will need to pursue a growthstrategy in spite of the growing risks, both internal and external.
Internal risks relate to domestic politics, stemming fromexpanding income inequality and the serious gaps in views on publicpolicies. External risks come from the rising geopolitical conflicts
among nations. Their causes vary and, as is represented by North
Korea, they are dependent upon a region or a country’s specifichistorical background. However, we may largely say that geopoliticalrisks today could be increased by the great convergence of national
powers in the world through IT. With IT, some emerging economies,
like the BRICS nations, could become industrially competitive byacquiring ideas fully mobilized on the Internet and combining themwith their cheap labor costs, as is described in Professor Richard
Baldwin’s book The Great Convergence. The reduced gap in national
2 Japan SPOTLIGHT • January / February 2018

economic power between the BRICS and the G7 countries could
become a cause of geopolitical conflicts between the two.
Our Jan./Feb. 2018 issue highlights such a possible transition
period and where the global economy or regional economies areheading at the beginning of 2018.
Anatole Kaletsky, partner and co-chairman of Gavekal Research Ltd.
and a columnist for Reuters and the International Herald Tribune,
discusses the general direction in which the global economy is headingin an interview article. Following this, we have a lineup ofcommentators on a particular region or country. Eric D. Lundell,president and CEO at International Technology and Trade Associates,Inc. (ITTA), a business consulting company, offers his outlook on theUS economy. Rudra Prosad Roy and Dr. Saikat Sinha Roy, former ADB
economists, talk about the Asian economy’s most serious impediments
to growth: income inequality and structural change. Yan Zhu, a Chineseeconomist living in Japan, shares his views on the mid-term
perspective of the Chinese economy. Then, Dr. Daniel Gros, a European
expert on economy and finance, talks about the EU economy’s
prospects in an interview, followed by Dr. Reinhilde Veugelers, anotherdistinguished European economist, who introduces the European “New
Industrial Policy”. Kazumasa Oguro, a longtime member of our
Editorial Committee, then talks about the most crucial part of“Abenomics”: the question of public financial debt management.
We then have five insightful articles focusing on the implicationsof US President Donald Trump’s economic and foreign policies for
the US and the rest of the world, which seem to have provoked avariety of reactions and arguments.
They begin with Dr. Constantine A. Pagedas, a political analyst,
commenting on US foreign policy, followed by my own article
attempting to give readers a succinct summary of the impact of US
economic policies on American business. We then have threeexperts’ views on the impact of US policies on the Asia-Pacific areain articles by Dr. Feiteng Zhong, a Chinese political scientist, GaryHawke, a New Zealand trade policy analyst, and Dr. Gilberto Llanto,a Philippine think tank president.
I hope all of you enjoy reading them and think about our future
beyond 2018.

COVER STORY 1
Interview with Anatole Kaletsky, Partner & co-Chairman of Gavekal Research Ltd.

In the Midst of Geopolitical Turmoil, an In-Depth
Look at Trends in the Global Economy Could Lead toa New Capitalism
By Japan SPOTLIGHTCOVERLEAD
Robust global economic recovery will continue for the next
few years, while we are looking for a new relationshipbetween regulation and market forces in the long run.

COVER STORY 2
Interview with Eric D. Lundell, President & CEO of ITTA, Inc.

Issues of the US Economy Under the Trump Administration
By Japan SPOTLIGHT

The US economy is in good shape today and will continue togrow at around 2%, which can be considered robust. Under
the new FRB chairman, monetary policy will be conducted in a
prudent manner, which lowers concerns about inflation, but
income inequality remains a big challenge to the US economy.

COVER STORY 3Structural Change & Inequality: Evidence from Asia
By Rudra Prosad Roy and Saikat Sinha Roy

Evidence from Asia shows that structural transformation ofthe economy would increase income inequality, proving thatstructural reform is not an easy task.

COVER STORY 4
The Mid-Term Outlook for the Chinese Economy
By Yan Zhu

Though the Chinese economy is currently in a slowdown
phase and in the mid term is saddled with various structuralissues that could hamper growth, positive growth factors will
work well and eventually it could achieve 5-7% economic
growth in the mid term.

COVER STORY 5

Relationship with the Bank of Japan
By Kazumasa Oguro

If we consider the government and BOJ as being a unit, it isimportant to understand that even if the BOJ owned government
bonds, the integrated debt cost basically does not change.

COVER STORY 8
Ugly American Diplomacy: Donald Trump & the Artof the Deal
By Constantine A. Pagedas

US foreign policy today is failing at the pivotal moment when
China appears to be stepping up and winning a public
relations battle, as many countries begin to second-guess
Washington and turn toward Beijing for global leadership.

COVER STORY 9“America First” Policy & Its Effects on US Business
By Naoyuki Haraoka

As is symbolized in the US auto industry’s opposition to
NAFTA renegotiation, the “America First” policy could have anegative effect upon US business.

COVER STORY 10“America First” & the Future of the Asia-PacificRegional Order
By Feiteng Zhong

If the world is entering a new era without US leadership,
Asian countries themselves should take the initiative todesign a new architecture based on regional realities.

Interview with Dr. Daniel Gros, Director of the Centre for European
Policy Studies

COVER STORY 11
Consequences of US Policies for Asia-Pacific

Prospects for the EU Economy & Economic Policy

By Gary Hawke

By Japan SPOTLIGHT

Current US policies, including security and trade policy withthe focus on “bilateral” deals, are not consistent with
Asia-Pacific objectives. Asia has to proceed without US
participation until US policies are changed.

The economic recovery of the EU is stable and consistent andwill continue for another couple of years. The main risks willbe “local political” risks and very little prospect of deep
structural reforms.

COVER STORY 6
Manufacturing a New Future
By Reinhilde Veugelers

In order to raise European growth potential, a “New IndustrialPolicy” is to be adopted to promote structural reforms andattract the high value-added activities of new manufacturing.

COVER STORY 7
The Current State of Japanese Public Finance & Its

COVER STORY 12
Implications of Donald Trump’s Protectionist Policies for ASEAN
By Gilberto Llanto

A rebounding US economy is good news for countries thathave close links with the US. But the protectionist policies
taken by the current US government will weaken global
growth prospects and in the end all countries will lose.
Naoyuki Haraoka is editor-in-chief of Japan SPOTLIGHT & executive
managing director of the Japan Economic Foundation (JEF).
Japan SPOTLIGHT • January / February 20183