The US slowdown comes at a particularly bad time for Japan which is already suffering from a combination of weak domestic demand – particularly consumer demand – and supply-side constraints reflecting pressures on the banking system, heavily burdened with non-performing loans, and an acknowledged need for restructuring parts of the non-financial sector. Japan has pretty well exhausted the scope for macro-economic stimulus. Successive fiscal packages focussed on public works, and a sustained period of attempted monetary expansion, at near-zero interest rates in the face of deflation, have failed to overcome a high rate of precautionary saving by an ageing population facing an uncertain economic future. The policy emphasis of the new Japanese administration appears to be shifting towards firmer action to bring about supply-side reform in the belief that this will help to engender greater confidence. The danger is that, to the extent that more aggressive restructuring results in bankruptcies and higher unemployment in the short term, that in itself might tend to weaken consumer demand for a time before the benefits of the restructuring come through. Closer to home, the Euro area economy is a good deal better placed to withstand the US slowdown although we are all bound to be affected to some degree. For most of last year the Euro area economy performed relatively strongly, with overall output growth well above trend, and unemployment in the area as a whole continuing to fall from its earlier chronically high level.

The international presumption in favour of free markets in itself is somewhat remarkable, given that, at the micro-economic level, increased competition invariably constitutes a threat to established producers – and their employees – who might well be tempted to urge protection in one form or another on their national governments. Consumers, who benefit from such competition, tend to be less vocal or well organised. The threat of protectionism is never, therefore, far away. But in fact the presumption in favour of competition has proved encouragingly robust. And that is not just in relation to international trade. There is a parallel presumption in favour of freedom of capital movements, and much greater openness around the world to foreign investment. Among other things on the supply-side, there is a shared emphasis on the need to direct public spending to developing human resources through education and training, to effective health care, and affordable social safety nets. There has been a global trend to privatisation through which governments have increasingly returned essentially commercial activities, in which they have no necessary comparative advantage, to market disciplines. And there is a common recognition of the need for reforms in labour and product markets designed to reduce distortions which impede the efficient allocation of resources. Now I do not pretend to you, Mr Chairman, that the international policy consensus in favour of macroeconomic stability and supply-side reform is fully articulated, particularly on the supply side; nor do I claim that it is subscribed to in its detail equally in every IMF member country.