M a y 2 7 , 2 0 1 9
Bank of Japan
Global Economy: Challenges and Policy Responses
Keynote Speech at the T20 Summit
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
It is a great honor for me to deliver this keynote speech at the T20 Summit. This year, Japan
assumes the G20 presidency for the first time. The G20 Finance Ministers and Central Bank
Governors Meeting in Fukuoka is fast approaching. I will be co-chairing the meeting with
Deputy Prime Minister and Finance Minister Aso. We will be discussing various key issues
regarding the global economy and finance. The T20, as an international forum for think tanks,
has also debated a wide range of issues on the global economy, along similar lines to the G20
discussions, and has provided policy proposals. I believe those proposals from think tanks,
with their expertise and unique viewpoints, provide valuable input for public sector policy
management. Needless to say, it is important that the private and public sectors exchange
views, learn from each other, and engage in constructive dialogue, in order to provide and
implement better policies. Today, I would like to talk about the challenges and policy
responses to the current situation in the global economy, hoping that my speech will
contribute to the discussions at the T20 Summit.
Specifically, I would like to elaborate on the medium-term challenges such as global
imbalances and international financial architecture. Before going into those issues, let me
begin with recent developments in the global economy.
I. Recent Developments in the Global Economy
The global economy registered high growth up to the first half of last year, but it has
decelerated since then, particularly in China and the euro area. Several factors account for
this deceleration.
First, there has been increased uncertainty regarding economic policy on a global level such
as trade tensions and the Brexit negotiations. This has put downward pressure on corporate
investment and international trade in capital goods. Second, at the same time, the so-called
silicon cycle has entered a downturn, something we have observed many times in the past.
Until the first half of last year, there was a claim that the "super-cycle" in demand for semi-
conductors was on a rising trend. According to the claim, semi-conductor demand would
increase steadily over the medium term. However, as was seen in the past, there have been
some cancellations of multiple orders for parts and capital goods, together with downward
revisions to final goods such as smartphones.
In addition to these two global factors, region-specific factors have contributed to the recent
deceleration in the global economy. The Chinese economy has shown some weakness due to
the lingering impact of deleveraging policy measures, together with trade tensions. In the euro
area, exports have decelerated, automobile production has been hampered by delays in
adjusting to new emissions regulations, and business sentiment have deteriorated due to
heightened uncertainty regarding political and economic conditions.
In short, these several factors have contributed to the slower pace of growth in the global
economy.
What then are the prospects for the global economy? The most recent World Economic
Outlook from the International Monetary Fund (IMF), published in April, indicates that the
global economy will regain positive momentum during the second half of this year. First,
economic policy measures in China and other regions will gradually begin to take effect.
China has decided to implement or has already implemented a range of policy measures since
the second half of last year, including fiscal and monetary policies. Some Asian emerging
economies are also expected to increase fiscal expenditures. In emerging economies in
general, monetary policy space has increased as the Federal Reserve has adopted a patient
stance regarding its policy normalization. Concerns over capital outflows, currency
depreciation, and heightened inflation have also eased relative to last year. Second,
production adjustments are likely to show progress in IT-related goods. Manufacturers in Asia,
including those in Japan, are now in an adjustment phase, but production of electronic parts
is expected to turn around and increase gradually in due course.
However, there remains a high degree of uncertainty regarding these prospects, and the
downside risks are large. Among them, I will touch upon four risk factors here.
The first is the impact of trade tensions. Although trade negotiations seem to have progressed
somewhat, a number of issues remain to be resolved. Due to the widening range of tariff
increases, trade costs may rise, and corporate activity could be subdued due to reconsideration
of production sites and global value chains.
The second risk is the effects of economic policy measures, such as those in China. China has
implemented a range of tax reduction measures, together with an increase in infrastructure
investment. The effect of these tax reductions, however, depends on the extent to which
households and firms increase their spending. Households' and firms' spending is affected by
their sentiments and prospects for the economy. Since we have seen heightened uncertainty
regarding, for example, trade tensions, we should be cautious about the effectiveness of these
policy measures.
The third risk comes from political factors. In addition to Brexit and political uncertainties in
Europe, political destabilization due to increasing income inequality could affect the global
economy through a decline in confidence and instability in financial and capital markets.
The fourth risk is vulnerability arising from accumulated debt in the private and public sectors.
The accumulation of public debt is the result of an increase in public expenditure after the
Lehman shock and rising social security payments. There is no doubt that such expenditures
have had a positive impact on the economy. However, securing long-term fiscal sustainability
is a precondition for maintaining economic stability. While accumulated private debt may be
the result of positive investment, such as corporate and housing investment, it does increase
the financial vulnerability of firms and households, making them susceptible to changes in
interest rates and financial market conditions. We therefore need to be vigilant about such
risks.
At each G20 meeting, we share our understanding on global economic conditions and
associated risks, and we discuss the necessary policy measures. Of course, the global
economy is changing continuously. In the run-up to the June G20 meeting in Fukuoka, we
will remain vigilant about these changes, while gathering all the necessary information. As
president of the G20, we will lead policy discussions at the meeting with all the relevant
information and appropriate evaluations of global economic conditions.
II. Global Imbalances
Among the G20 policy agendas, let me focus on two medium- to long-term issues: global
imbalances and international financial architecture.
First, on global imbalances. Although the issue has long been a topic for discussion at G20
meetings, we have had limited opportunity in the recent past to discuss it in great depth. We
have therefore decided to put the issue on the table of G20 meetings again this year. We will
analyze the trend and background of global imbalances and discuss the appropriate policy
actions.
Looking back on the global trend before the Lehman shock, we saw excess consumption and
investment on the back of soaring asset prices in the United States, and an expansion in
current account deficit as the mirror image of these domestic excesses. On the other hand,
emerging economies took a cautious approach to investment, partly because of the trauma of
past balance-of-payment crises, and as a result, their current account surplus accumulated.
When asset prices plunged and domestic demand shrank in the United States, the saving-
investment balance subsequently recovered. The expanding trend of U.S. current account
deficit stopped. Meanwhile, emerging economies experienced a deterioration in trade
balances due to the slowdown of the global economy triggered by the global financial crisis.
The increasing trend of their current account surplus stopped.
It is not necessarily true that deficit is bad and surplus is good with regard to global
imbalances. As textbook macroeconomics tells us, the current account is equivalent to the
domestic saving-investment balance. It is not appropriate to judge whether it is in a good
situation or not merely by seeing if there is a deficit or surplus. For example, it is better for
emerging economies with high growth potential to borrow abroad, invest at home, and realize
higher economic growth. On the other hand, for countries with limited growth opportunities,
it is better to invest abroad and earn higher returns. In these circumstances, countries with
abundant investment opportunities are more likely to see investment exceed savings, resulting
in a current account deficit. Meanwhile, countries with limited growth opportunities see
savings exceed investment, hence a current account surplus. Optimal saving-investment
balances and associated current account balances differ from country to country, depending
on individual circumstances. What we need to determine is whether the actual saving-
investment balances and current account balances have diverged from the optimal levels that
reflect economic fundamentals. If the balances do not reflect economic fundamentals, we then
need to examine whether or not this divergence is the result of disequilibrium of the economy
and finance and inappropriate policy measures.
In order to realize sustainable and balanced economic growth, we cannot overlook excess
current account imbalances that are not in line with fundamentals. Bilateral trade measures
will not help resolve such imbalances. These are primarily issues for multilateral and macro
saving-investment consideration.
Global imbalances will be discussed intensively at the G20 meeting this year. In particular,
we will promote understanding that we need to examine whether the current levels of global
imbalances are appropriate or excess, taking into account the importance of structural factors
such as aging.
III. International Financial Architecture
Along with global imbalances, international financial architecture has also long been on the
agenda at the G20 meetings. The global economy has suffered the enormous negative impact
of financial and economic crises such as the Asian crisis in the late 1990s, the global financial
crisis after the Lehman shock, and the subsequent European sovereign debt crisis.
To prevent such crises from occurring again, each country must implement the appropriate
economic policies to avoid accumulating economic and financial sector imbalances. Looking
back on history, we have seen how asset bubbles in stocks and real estate, as well as excessive
lending by financial institutions, have contributed to overheating the economy, and vice versa,
and how current account deficits and accumulated external debt have become the source of
crises. One lesson history teaches us is that, by helping to stem the source of crises,
appropriate economic policy management is definitely the first line of defense in crisis
prevention. Rigorous monitoring of the global economy and financial conditions is crucial to
detecting the early signs of crisis. With this in mind, we intensively examine global economic
and financial conditions at every G20 meeting.
Of course, experience has taught us the difficulty of prior detection of excessive activities and
imbalances. That is why we also need to prepare crisis management policy tools to prevent
crises from spreading. The IMF's lending facilities play a crucial role in such crisis
management. One of the important functions of the IMF is to provide short-term lending to a
country with a balance-of-payments crisis. The IMF's role in times of crisis has become even
more important as international trade and financial transactions have expanded.
Besides the IMF lending in times of crisis, regional financing arrangements (RFA) are also
expected to be used. In Asia, the Chiang Mai Initiative Multilateralization (CMIM) is one
such arrangement. Japan, China, Korea, and the ASEAN countries participate in the initiative.
Once a crisis occurs, each country is expected to provide the funds necessary to prevent the
crisis from spreading. In order to mobilize funds promptly, there is the so-called de-link
portion of the fund. This portion comprises 30 percent of the total funds, and is not directly
linked to the lending from the IMF. We have also seen an expansion in bilateral swap
agreements. When a crisis occurs, countries can use a swap agreement to exchange their
currency for another in order to obtain the funds needed for international transactions.
In short, we now have multiple layers of measures to cope with global financial crises, with
IMF lending playing the central role, supplemented by regional financing arrangements and
bilateral swap agreements.
Thanks to this enhancement of international financial architecture, together with the
strengthening of financial regulations following the global financial crisis, it is fair to say that
the resilience of the global economy and financial system has been increased. Nevertheless,
it is important to remain vigilant as global financial and economic conditions continue to
evolve dramatically. A key element of surveillance is ensuring that no potential sources of
crisis have been overlooked. We have seen rapid and revolutionary innovations in information
and communication technologies in particular, and financial activities could expand beyond
the scope of current regulatory and surveillance frameworks. We have also seen the migration
of financial activities to the non-banking sector as regulations on the banking sector have
been tightened. To address such non-traditional flows of funds, it may be necessary to expand
the tools used and the range of data subject to surveillance in order to detect signs of a crisis.
The policy actions of individual countries and international coordination to tackle the
imbalances identified by such surveillance are also important issues for discussion. In
addition to monetary and fiscal policy, macroprudential policy measures are increasingly used
to address these financial imbalances. Macroprudential policy measures such as
countercyclical capital buffers, stress testing, and regulatory measures on lending are all
valuable areas for the exchange of ideas and mutual learning. To enhance crisis management
in international finance, we need to continue discussing the appropriate modalities for the
facilities provided by different entities.
Concluding Remarks
As I have mentioned, there are a number of important issues to be considered regarding the
current state of the global economy. We will be discussing these issues at the G20 meetings
this year. The analyses and policy proposals from think tanks provide invaluable input for our
discussions, especially considering the wide range of issues related to the global economy. I
would like to conclude my speech with the hope that today's T20 Summit will prompt further
collaboration between the private and public sectors.
Thank you very much for your attention.