This may be storing up trouble for the future. These worries are neither new, nor lessened by the fact that the world economy has strengthened in spite of growing financial imbalances. We have witnessed too many crises in the last decade not to know that market confidence can shift suddenly. A soft landing is by no means assured. But we can improve the chances of a soft landing by appropriate monetary and fiscal policies, and by implementing further structural reforms.
External imbalances reflect differences in demand as well as the configuration of exchange rates.
For current account imbalances to adjust smoothly, growth in the United States needs to slow to a more sustainable rate, and growth elsewhere needs to continue to strengthen. A firm commitment to deregulation and other structural reforms could boost consumer and business confidence in Japan. Demand is picking up in Europe, but more could be done to support growth. In particular, additional labour market, pension system and fiscal reforms would enhance investment opportunities in the euro area. Further liberalisation and fiscal consolidation would also help to improve the competitiveness of Latin America's industries, and thereby ease concerns about that region's widening current account deficit.