Chapter

1

Section 1
Transformation of the International
Order and the World Economy

Part Ⅰ

Major Issues in the Asia-PacificRegion in 2023–2024

Part ⅢPart Ⅳ

Looking back on the world situation in 2022, although the coronavirus disease(hereafter, COVID-19) is showing signs of being under control, events continued
to remind us that we have entered a new phase of global political and economic
divide and conflict, as evidenced by the Russian invasion of Ukraine in February.
Frequent extreme weather events and natural disasters around the world also
indicate that climate change has become an issue of global significance that canno longer be taken lightly.
It is needless to point out once again that China has become a global player
in international politics and the world economy since the beginning of this century. Like Japan, however, China’s declining and aging population has been amajor stumbling block to economic growth. China’s total fertility rate (TFR)
has dropped below 1.2, lower than that of Japan. Until the Cultural Revolution,
China’s TFR was around 6.0, and the “One-Child Policy” was introduced in1979 as a solution to the food shortage problem. However, this radical policy
was abandoned due to the labor shortage and wages improved with economic
growth, and from 2021, “three children” were allowed, and various pronatalistic
measures introduced.
Meanwhile, in Russia, the TFR temporarily dropped to around 1.2 at the endof the 20th century, and the government launched a policy of providing generous benefits to parents with two or more children. Although the birth rate has
recovered somewhat since then, the Putin administration’s concerns about adeclining population appear to be quite strong. The Russian government seems
to be facing a significant crisis due to the decline in the number of troops and thetendency of professional personnel to leave the country.

Part ⅡINOKI, Takenori, IMAI, Ko

4Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

The future appears uncertain for the authoritarian states like China andRussia when considering indicators such as the working-age population andeconomic vitality. Expansion and growth are typically the results of virtuous
cycles, but once the economy moves into a contractionary phase, numerous
challenges arise. It is undeniable that the territorial expansionism of the Xi
Jinping regime and the imperialism of contemporary Russia are in part uncontrolled actions driven by fears of future governance challenges stemming from ashrinking population and economic stagnation. However, government intervention in childbearing in a liberal democratic state is unlikely to have much effectunless each individual is able to envision a positive outlook towards marriage
and family.
The spread of COVID-19 and Russia’s invasion of Ukraine had the effect ofchanging energy prices and the flow of food imports and exports by severing
supply chains and blocking trade ports. Furthermore, in response to the pandemic, all countries were forced to launch aggressive fiscal measures as partof their economic policies. Now that the virus is in the process of being contained, it is necessary to take a long-term perspective on fiscal discipline, as the
pandemic has temporarily caused a marked increase in public debt worldwide.
Although there has been a slight decline in public debt as concerns about thevirus have eased in Europe and the United States, it remains considerably high.
This high level of public debt and its increase will exert inflationary pressure.
It remains to be seen whether the global inflation, fluctuating with highs andlows, will be transitory or become chronic and persistent. What stance will betaken on the issue of fiscal discipline in the future, when a large amount of funds
will be needed for defense spending and economic restructuring? The first stepis to determine the nature of inflation, which will be a difficult task. Japan’s monetary authorities, under the leadership of new Bank of Japan Governor Ueda,
have made it clear that, unlike other major advanced economies, they will continue their large-scale easing measures, but will also begin a review of theirmonetary policy over the past quarter century and its side effects.
Section 1 provides an overview of the current global economic challenges
and identifies major factors that could destabilize the Japanese economy, alongwith discussing potential future scenarios.

1. Current State of Inflation and Situation in Each Country
The supply- and demand-side factors of inflation are linked by a complex causal
relationship that includes the inflation expectations of each economic agent,
and are largely determined by domestic monetary and fiscal policies, as well asTable 1-1-1Country

Consumer Price Indexes and Estimates: 2015-25

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

France

0.1

0.3

1.2

2.1

1.3

0.5

2.1

5.9

5.0

2.5

2025
2.1

Germany

0.7

0.4

1.7

1.9

1.4

0.4

3.2

8.7

6.2

3.1

2.3

Japan

0.8

-0.1

0.5

1.0

0.5

0.0

-0.2

2.5

2.7

2.2

1.6

UK

0.0

0.7

2.7

2.5

1.8

0.9

2.6

9.1

6.8

3.0

1.8

USA

0.1

1.3

2.1

2.4

1.8

1.3

4.7

8.0

4.5

2.3

2.1

China

1.5

2.1

1.5

1.9

2.9

2.5

0.9

1.9

2.0

2.2

2.2

Russia

15.5

7.0

3.7

2.9

4.5

3.4

6.7

13.8

7.0

4.6

4.0

Note 1: Annual average inflation rate of consumer prices for the specific year
Note 2: Estimates for France and Russia in 2022 and all countries in 2023, 2024, and 2025
Source: Prepared by the author using data from International Monetary Fund, World Economic Outlook Database, April 2023

Part Ⅱ
Part Ⅲ

exchange rates (currency fluctuations). In 2022, the impact of Russia’s invasionof Ukraine led to a dramatic increase in energy and food prices, which further
intensified inflationary pressure on the global economy, especially in the eurozone. In the case of Japan, which had been in a chronic “deflationary state,” inflation has so far remained low by world market standards. Nevertheless, risingfood and energy prices has been a contributing factor preventing companies
from increasing wages in 2022. The sharp rise in energy and raw material prices
is believed to have been a “cost-push” force. Table 1-1-1 shows the movementsof the consumer price index (CPI) in major countries.
In 2021, the U.S. experienced a significant increase in the annual average
inflation rate. This was sometimes attributed to “temporary inflation” resulting
from the release of “pent-up demand” that had initially been suppressed by the
COVID-19 pandemic. However, the average annual inflation rate continued torise to 8% in the subsequent year of 2022. In response, despite the looming riskof a recession beginning in March 2022, the Federal Reserve Board (FRB) took
decisive action, aggressively raising interest rates to curb inflation. This level ofinflation, reaching 8% YoY, marked the highest since the second oil crisis.
In the eurozone, inflationary trends have become more pronounced,
similar to those in the United States. Consumer prices have surged in majorcountries such as France, Germany, and the United Kingdom. Fears of inflation due to fiscal expansion triggered by Russia’s invasion of Ukraine prompted
the European Central Bank (ECB) to sharply raise interest rates by 0.75% in
September 2022, followed by another 0.75% increase at the October meeting of
its Executive Board. When inflation expectations themselves increase, a mechanism may be set in motion that further exacerbates actual inflation. The policy ofraising interest rates is considered to be a precautionary measure against such

Part Ⅰ

5Part Ⅳ

Section 1 / Transformation of the International Order and the World Economy

6

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024“forecast effects.”
For Russia and China, both facing economic and political challenges, pinpointing a single reason for the changes in inflation rates is difficult. In Russia,
the depreciation of the ruble prompted the Russian central bank to take theemergency step of raising its policy rate to 20% to avoid the risk of inflation
caused by the depreciation of its currency. The IMF’s Economic Outlook estimates Russia’s average annual inflation rate at 14% in 2022.
In China, inflation has remained slightly below 2% for the past year. Even
before the outbreak of the pandemic, prices in China had been relatively stable.
Consumer demand has been suppressed (pent-up) by the “ZeroCOVID Policy”
due to the spread of the coronavirus infection. A heightened sense of caution
due to the real estate crisis might also have had a substantial impact.
The impact of the unilateral interest rate hike policy of the U.S. has beensignificant for the world as a whole. This policy not only led to the dollar’s appreciation but also caused currencies of countries with substantial trade volumes
with the U.S. to depreciate, leading to a sharp increase in import prices. Thesesoaring import prices essentially exported inflation from the U.S. to the rest of
the world, altering global trade flows.

2. Change and Recovery in Trade Volume
In 2021, as the impact of the new coronavirus somewhat weakened, there was ageneral recovery in global trade. However, the degree of recovery varied acrossdifferent industry sectors and products. Industries such as telecommunications
equipment, precision instruments, and transportation vehicles, which sufferedfrom a shortage of semiconductors due to supply chain disruptions, showed aremarkable recovery, while trade in the energy sector, where price hikes wereconspicuous through 2022, showed a high rate of increase in terms of value.
All countries and regions observed a noticeable decrease in trade. It’s worth
noting that the “trade in services” sector was hit harder by the coronavirus
spread than the trade in goods, with severe restrictions on people’s movements,
especially across borders, severely impacting the travel and transportationindustry. According to United Nations Conference on Trade and Development(UNCTAD) Trade Statistics, YoY, the value of exports of travel services fell by
81.8% in the second quarter of 2020. However, in the first quarter of 2022, thevalue of exports of travel services showed a sharp and rapid recovery, with anincrease of 88.5%, demonstrating a quick rebound from the sudden downturn.
Since global trade was in a recovery phase, increases in both imports andexports were observed in almost all countries, including China, the United

%
200.0

%
60.0
50.0

150.0

40.0

100.0

30.0
20.0

50.0

10.0

0.0

0.0
-10.0

-50.0

-20.0

Figure 1-1-1

3

1

/0

1

/0

23

23

20

9

/1

22

20

7

/0

20

5

/0

22

22

20

3

/0

22

20

1

/0

20

1

/0

22

22

20

9

/1

21

20

7

/0

Exports (Left Axis)

20

5

/0

21

20

3

/0

21

21

20

1

/0

20

1

/0

21

20

9

/1

21

20

20

7

/0

20

5

/0

20

20

/0

20

20

20

20

/0

/0

20

20

20

20

3

-30.0

1

-100.0

Imports (Right Axis)

China’s Imports and Exports YoY : January 2020 - April 2023

Source: Compiled by the author using data from the General Administration of Customs of the People’s Republicof China

Part Ⅱ
Part Ⅲ

States, Germany, Japan, and the Netherlands. However, it should be noted thatchanges in the value of trade varied by country, with some countries recording
a widening trade deficit and others posting large surpluses. The largest trade
deficits are observed in the U.S., Germany, Japan, and the Netherlands.
The main causes of the growing deficits appear to differ from country tocountry. In the Eurozone, energy prices have been rising since the beginningof the war of aggression against Ukraine in 2022, which has had a major impact
on the area. In Japan, not only energy prices but also the rapid depreciation of
the JPY contributed to the increase in imports. In the U.S., the trade deficit with
China (China accounts for one-third of the total U.S. trade deficit) had been
shrinking due to “Additional Tariff Measures” implemented during the tariff
war against China under the previous Trump administration. However, over the
past year, imports from China have begun to expand, resulting in a goods trade
deficit in excess of $1 trillion.
It is undeniable that the “tariff surcharge” has increased inflationary pressure on U.S. retailers and consumers by adding tariffs on many daily necessities,
including clothing made in China. There are reports of considerations to review
this measure under the Biden administration, but there are also opposition
opinions within the Democratic Party. However, some predict that eliminating
tariffs on China, the U.S.’s largest trading partner, could suppress the domestic
consumer price index by 1% or more. Under these circumstances, the Biden
administration is faced with a difficult choice: protect manufacturing workers
or contain inflation. Figure 1-1-1 illustrates the changes in China’s imports andexports from January 2020 to April 2023.

Part Ⅰ

7

Part Ⅳ

Section 1 / Transformation of the International Order and the World Economy

8

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

China is the world’s largest exporter and second-largest importer, while
the United States occupies the contrasting positions of being the world’s largest
importer and second-largest exporter. The United States lags far behind China
in exports, and its second place and huge trade deficit clearly show the problems of U.S. trade with China.

3. Current Public Debt Outstandings
How did the ratio of national debt (total general government debt including
national, regional, and social security funds) to GDP change as a result ofRussia’s invasion of Ukraine during the COVID-19 pandemic? As mentioned
earlier, the U.S. Fed has been raising interest rates since March 2022, and it isnecessary to consider the risk factors implied by these rate hikes. It is crucial
to contemplate the implicit risk factors due to these hikes, such as the potential
expansion of domestic private-sector debt, leading to financial crises in countries aligning with U.S. policies. The U.S. Fed’s “inflation control” measures are
not unrelated to its policy of raising interest rates, as bank failures that havebeen occurring in the U.S. since the spring of 2023 demonstrate.
The Bank for International Settlements (BIS) statistics, Credit to thenon-financial sector, allows us to calculate the debt of the non-financial sector
as a percentage of GDP in three categories: “general government debt,”
Table 1-1-2Country

Nonfinancial Sector Sectoral Debt of Major Countries as % of GDP
3rd Quarter of 2022
General Government

Non-Financial
Corporations

Household Accounting
Departments

Canada

90.1

113.8

103.2

France

109.6

164.1

66.5

Germany

64.0

73.4

55.7

Italy

142.2

69.6

42.6

Japan

231.3

116.8

67.9

Korea

44.2

119.2

105.3

UK

94.9

69.5

84.5

USA

103.5

78.8

75.2

China

NA

158.2

61.4

Hong Kong

NA

279.2

94.8

India

NA

52.2

35.5

Russia

NA

72.8

21.0

Note: Data for NA not yet publishedSource: Prepared by the author using data from Bank for International Settlements (BIS)4. Changes in Military Expenditures of Major Countries
The impact of Russia’s invasion of Ukraine on world trade has been discussed
earlier. The nature of this impact varies depending on the nature of trade with
Russia, and the impact of import restrictions from Russia on the economy of thecountry varies qualitatively. For example, the EU saw a significant change in thevalue of its imports and exports to Russia in March 2022, the month following
the start of the war of aggression against Ukraine. Export restrictions on Russia
reduced the supply of high-tech products such as semiconductors, and the valueof exports dropped by almost half from 7.37 billion euros in February to 3.84
billion euros in March. On the other hand, primary commodities such as wheat
and natural gas were highly dependent on imports from Russia, so imports
could not be completely shut down immediately, and the value of imports has
increased due to soaring energy prices.

Part Ⅱ
Part Ⅲ“non-financial corporate debt,” and “household debt.”
As for the debt-to-GDP ratio of the non-financial sector, except for Hong
Kong, where the debt situation of government finances and corporations is ina special position, Japan, as is well known, is the top country in terms of theseverity of the debt situation of the non-financial sector (416.0%). Japan’s debt
situation is characterized by the fact that the debt-to-GDP ratio of the “general
government debt sector” is by far the highest by sector. However, the debtto-GDP ratio of the non-financial corporate debt sector is lower than those ofFrance and Korea, and the debt-to-GDP ratio of the household debt sector islower than those of Korea, Canada, the United Kingdom, and the United States.
At the end of 2021, the U.S. Congress passed a bill to raise the legal limit
on federal government debt to $31.4 trillion to avoid a so-called “Government
Shutdown,” but by the end of January of the following year, it exceeded $30
trillion for the first time, marking a severe situation. Such government shutdowns are not uncommon in U.S. history, and in May 2023, the U.S. again faced
the problem of a government shutdown and default if the debt ceiling was notraised. The crisis was averted in exchange for the Republicans cutting educationand social programs in pursuance of a further increase in the debt ceiling fromits current level of $31.4 trillion.
In addition to Greece and Italy, Portugal, Ireland, Spain, and other eurozone countries with heavy government debt, as well as China and South Korea,
which are facing significant risks due to an overheated real estate market, areconfronted with significant challenges in navigating the issue of rising interest
rates.

Part Ⅰ

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Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

At the same time, we will examine changes in the size and composition ofeach country’s fiscal expenditures, particularly with respect to military spending. Russia’s aggression against Ukraine, which has had a major impact oninternational relations, has also aggravated Russia’s own finances through asignificant increase in military expenditures. Comparing the “ratio of military
expenditures to GDP” of major countries between 2019 and 2022 using datafrom the Stockholm International Peace Research Institute (SIPRI), no significant changes can be seen.
However, significant increases in absolute military expenditures can beobserved in most major countries, including the United States (+9%), the United
Kingdom (+20%), Germany (+14%), and France (+13%) among the major NATOcountries. It is noteworthy that while the U.S. is the world’s largest militaryspender, China, in second place with the reunification of Taiwan in mind, hasrecorded a 22% increase. Although Russia’s military spending in 2022 increasedaround the time of the invasion of Ukraine, the total increase in military spending
for the entire year of 2022 is negligible, partly due to previous financial strains.
For a more accurate assessment, reviewing the 2023 data will be necessary.

Table 1-1-3

Country

Military Expenditures of Major Countries as % of GDP (SIPRI)
Percentage of GDP
2019

Percentage of government spending

2022

2019

2022

USA

3.43%

3.45%

NA

Australia

1.88%

1.90%

4.82%

NA
5.02%

India

2.55%

2.43%

9.14%

8.26%

China

1.68%

1.60%

4.91%

4.79%

Japan

0.99%

1.08%

2.66%

2.53%

Korea

2.67%

2.72%

11.85%

10.57%

Myanmar

2.19%

3.05%

10.81%

14.24%

USSR

NA

NA

NA

NA

Finland

1.35%

1.72%

2.54%

3.22%

France

1.84%

1.94%

3.32%

3.43%

Germany

1.26%

1.39%

2.81%

2.75%

UK

1.98%

2.23%

5.14%

5.29%

Iran

2.01%

2.59%

13.92%

17.32%

Saudi Arabia

8.13%

7.42%

23.15%

27.79%

Note: Data for NA not yet publishedSource: Organized by the author using data form Stockholm International Peace Research Institute (SIPRI)

Section 1 / Transformation of the International Order and the World Economy

11

Part Ⅱ
Part ⅢPart Ⅳ

Finally, I would like to add a comment on the outlook for the global economy fromthe perspective of changes in trade policy and the possibility of bloc formation.
The EU acted swiftly to impose sanctions against Russia, suspending
imports of Russian coal in August 2022 and initiating a phased embargo on oil
and natural gas. These measures must have been a difficult choice for the EU.
In fact, the EU as a whole is not completely aligned. The pro-Russian Orban
government in Hungary has allowed some oil imports from Russia, for example.
Another contributing factor to the food crisis was the destabilization of theworld grain market due to the massive disruption in the supply of Ukrainian
wheat. Despite mediation efforts by Turkey and the UN, resulting in the liftingof the blockade on the port of Odessa, turmoil persists in the grain market.
Notable importers such as Indonesia, Turkey, and China continue to face challenges, keeping the market in a state of flux. Additionally, the market has been
adversely affected by extreme weather conditions, adding another layer of
instability.
This movement toward trade fragmentation and a bloc economy had alreadyoccurred with the severing of the supply chain by the coronavirus. The conflictin Ukraine also caused major cracks in the trade structure due to energy andfood transportation problems, revealing a serious dilemma of “the separationof politics and economy.” A prime example of this is that, from the perspectiveof national security, the U.S. further strengthened its efforts to hinder China’s
technological progress by limiting trade with non-friendly countries and restricting exports to China of products whose “technology and equipment are for both
civilian and military use” (so-called dual use).
In 2022, the WTO’s Dispute Settlement Subcommittee concluded that these
U.S. tariff measures “do not constitute a war or a state of emergency in international relations” and that the U.S. “tariff increases” were not allowed. Since
then, the U.S. has been steering its policy toward building a strong supply chain
and preventing the military diversion of high-tech technology in China, including subsidy measures to attract semiconductor manufacturing companies to thecountry through the “CHIPS and Science Act” of August 2022 and focusing on
concluding a framework trade agreement to exclude China. The global cooperative framework of U.S. politics and trade policy in recent years has been geared
toward so-called “friend-sharing,” a strategy that emphasizes trade and supply
chains with U.S. allies and friends, while keeping China in mind.
Economics can lucidly explain the benefits from free trade and globalization. But how do we deal with situations in which citizens of countries that

Part Ⅰ

5. Trade Policy Change and Anti-Globalization

12

Chapter 1 / Major Issues in the Asia-Pacific Region in 2023–2024

prosper from free trade face difficulties that offend public sentiment, such as
widening income inequality within a country? Unless sufficient consideration
is given to this point, the future of free and multilateral trade is not bright. The
shift in national security policies by Germany and other EU countries, reducing
dependence on the Chinese and Russian economies, is a political maneuver tonavigate away from significant economic and political dilemmas. It is not uncommon to find situations where economic interests and the maintenance of peace
are incompatible. Striking the right balance is a task left to domestic politics anddiplomacy.
References
BIS
https://data.bis.org/topics/TOTAL_CREDIT
Cristina Constantinescu(2022)
As global mobility restrictions have been lifted, travel services are making
a comeback.
https://blogs.worldbank.org/trade/trade-and-development-chart-travelrebounding-covid-19-hit
General Administration of Customs of the People’s Republic of China
http://www.customs.gov.cn/
IMF World Economic Outlook Database
https://www.imf.org/en/Publications/WEO/weo-database/2023/April/select-country-group
Stockholm International Peace Research Institutehttps://www.sipri.org/databases/milex/sources-and-methods.