Janet L Yellen: Japan in the global economy
Speech by Ms Janet L Yellen, Vice Chair of the Board of Governors of the Federal Reserve
System, at the Institute of International Finance Annual Membership Meeting, Tokyo,
11 October 2012.
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I greatly appreciate the invitation from the Institute of International Finance to participate in
this session on Japan's role in the global economy. Today, I will offer some reflections on
factors holding back the recovery in advanced economies, the contribution that emerging
Asia can make in boosting global growth, and the challenges facing Japan.
We have seen marked differences in the strength of countries' recoveries from the global
financial crisis. Most advanced economies are growing very slowly and operating well short
of potential. By historical standards, their performance is even more anemic that we would
have expected, given the nature of the previous recession. This shortfall likely reflects the
unusually limited scope for fiscal stimulus at present, which very accommodative monetary
policies have not been able to fully offset. The recovery from the global recession of
emerging market economies, especially in Asia, has been more robust, but even these
economies are slowing in the face of weak global demand, and they would benefit from
further progress toward a more balanced model of growth led by domestic demand. Finally,
until its tragic earthquake and tsunami, Japan was also recovering more rapidly than the
other advanced economies. But it, too, faces issues with the longer-run sustainability of its
debt as well as other structural challenges that need to be addressed.
The weakness of the recovery in the advanced economies
The global financial crisis resulted in the most severe worldwide recession since the
Great Depression. Historically, such crises tend to leave persistent scars on the real
economy, and the current weak recovery in the advanced economies appears to be no
exception. Economists at the Federal Reserve Board have added to the growing body of
research analyzing recessions and their aftermath, focusing specifically on the factors that
determine the pace of recovery once the economy has hit bottom.1 They find that recoveries
tend to be faster following deeper recessions, but slower following long recessions.
Recoveries from recessions associated with housing busts also tend to be unusually weak.
This research finds that for the advanced economies - especially Europe and the
United States - the growth in output has been somewhat weaker than past history would
have suggested, even accounting for the depth and duration of the last downturn. Although
monetary policy has been highly accommodative, the pace of fiscal consolidation in Europe
and the United States has been much greater during this recovery than is typical following
severe recessions. Additionally, in Europe, financial strains have been acute, helping to push
the region back into recession. In the United States, spillovers from Europe and a
still-depressed housing market also help account for our tepid recovery and elevated
unemployment. As I will discuss a bit later, Japan has fared somewhat better, but faces
significant challenges of its own.
The role of emerging Asia
In contrast to the advanced economies, emerging market economies, particularly in Asia,
recovered sharply from the global downturn, in part by using countercyclical fiscal and
monetary policies to bolster domestic demand. Based on the research I referred to earlier,
the recovery in the Asian economies appears on pace with what we might have expected,
given the severity of the previous recession. This swift recovery has not only benefited Asia,
but the global economy as well.
Lately, however, the momentum in the emerging Asian economies has weakened, in part as
their exports to Europe and the United States have slowed. Exports to China from other
countries in the region have also weakened, partly because of the unwinding of China's
earlier stimulus programs, but also because China's exports to the advanced economies
have slowed, thus lowering its demand for imported parts and components. For the moment,
emerging Asia is offsetting weakness in external demand through accommodative monetary
and fiscal policies. But ultimately, it would be desirable, both for the region and for the global
economy, if emerging Asia were able to rely less on temporary policy stimulus and more on a
fundamental rebalancing of growth toward domestic demand. To be sure, progress toward
rebalancing has already occurred, as evidenced by the substantial reduction in current
account surpluses in the region since the onset of the global crisis. However, some of this
adjustment likely reflects cyclical factors, and, moreover, the aggregate current account of
emerging Asia remains substantially in surplus.
Greater reliance on domestic demand would not only help shield Asia's economic growth
from the weakness in the advanced economies; it would also boost the well-being of its
citizens by enabling them to consume a greater share of the output they produce. Moreover,
transforming emerging Asia into an independent engine of global growth would put the global
economy on a much surer footing, thus helping to achieve the Group of Twenty nations'
commitment to strong, sustainable, and balanced growth.
What about Japan?
Finally, I would like to turn to Japan, whose experience combines elements of both its
emerging Asian neighbors and of other advanced economies. Like other Asian economies,
Japan shares a history of current account surpluses and export-dependent growth. Also like
other Asian economies, the Japanese economy bounced back faster from the global financial
crisis, at least prior to its tragic earthquake and tsunami, than most advanced economies,
and more robustly than in any Japanese recovery since the mid-1970s. Strong exports to the
rest of Asia supported this rebound. However, Japan has not been immune to the slowdown
in trade affecting the region. Japanese exports have flattened out since about the middle of
2010, contributing to a negative trade balance for the first time since 1980. Like its neighbors,
Japan will need to look for alternative engines of growth.
Notwithstanding its similarities to emerging Asia, the Japanese economy faces fiscal and
demographic challenges similar to those of other advanced economies in Europe and the
United States. Japanese government spending helped propel the economy's bounceback
from recession, but it has also added to public debt, which the International Monetary Fund
now projects will rise to 237 percent of gross domestic product (GDP) this year, the largest
among the major advanced economies.2 Along with this high debt, aging of the population
and slow GDP growth pose important concerns for fiscal sustainability.
To date, the savings of Japanese household and firms have been more than enough to
finance the government deficit; indeed, interest rates on government debt have fallen to near
record lows. Accordingly, Japan, like the United States, has the scope to carry out fiscal
consolidation plans that address long-run sustainability issues without endangering
near-term growth prospects. Currently, policymakers in both Japan and the United States
face the challenge of designing policies that provide a credible commitment to medium-term
deficit reduction without disrupting the fragile recovery. But once in place, such policies
should help reduce uncertainty and boost household and business confidence.
Japan would also benefit from measures to increase its potential growth, which is generally
estimated to have fallen to less than 1 percent and could decline further as population aging
progresses. It is widely believed that easing regulations could promote faster productivity
growth, particularly in the services sector. Declines in the working-age population also make
it desirable to boost labor force participation. Higher employment and faster productivity
gains would help to boost economic activity, enhance fiscal sustainability, and restore
Japan's contributions to global economic growth.
Conclusion
Growth in the advanced economies is still hampered by critical challenges and full recovery
is likely to take several years. Emerging market economies, particularly in Asia, have
performed better, but both they and the global economy more generally would benefit by
further rebalancing of their growth toward domestic demand. Japan initially bounced back
more quickly than other advanced economies from the global financial crisis, but its growth
has slowed recently, and it also faces serious fiscal and structural challenges. By addressing
these challenges, Japan can enhance its long-term prospects and continue to play a leading
role in Asia and the global economy.