Fiscal policy continues to be used to prop up aggregate demand, although after years of deficit spending it is at its political limit. The Bank of Japan actually raised interest rates slightly in August, even though most economists inside and outside of Japan believed this to be foolhardy. We expect that stabilization of the labor market situation and income growth will underpin some consumption growth in 2001, helping to get Japan on a sustainable private sector led recovery track. But that recovery is unlikely to be robust. On the plus side is Japan s strength in emerging technologies, such as wireless internet services, that could create a more dynamic high tech economy.
Slower growth is in the offing for most rich, industrialized economies.
That will be felt at home in somewhat higher unemployment rates, slower income growth, and falling profit rates. Slowing in North America and Europe will be transmitted globally through weaker trade and investment. The focus of discourse has now shifted away from the dangers of too much growth to the perils of a possible hard landing. These risks must be assessed in context. The global economy begins 2001 in the strongest position that it has seen in many years, providing room for cooling without excessive pain.