inflation - expectations environment and suggest that policy should be oriented toward minimizing the risk of the u. s. economy slipping into such a situation. downside risks are also present in emerging market economies, where growth has slowed rapidly in recent years. 9 most importantly, china is undergoing a challenging transition from a growth model based on investment, exports, and debt - fueled state - owned enterprises to one driven by consumption, services, and dynamic private businesses. because of the adjustment costs along this transition path and demographic trends, chinese growth will likely continue to slow. given that china has experienced very high growth in corporate debt, this downshift could pose risks. importantly, chinese authorities have made some progress on clarifying their policy stance, and capital outflows have slowed in recent months. nonetheless, considerable uncertainty remains, and further volatility cannot be ruled out. the importance of chinese growth and stability to many emerging market economies and to global markets more broadly implies that these risks have global implications. headwinds from abroad should matter to u. s. policymakers because recent experience suggests global financial markets are tightly integrated, such that disturbances emanating from chinese or euro - area financial markets quickly spill over to u. s. financial markets. the fallout from adverse foreign shocks appears to be more powerfully transmitted to the u. s. than previously. indeed, recent research suggests that changes in expectations regarding the path of policy in the united states relative to other major economies lead to exchange rate movements that appear to be several times bigger than they were several years ago. 10 the fact that many advanced economies are suffering from deficient demand and have policy rates at or near the zero bound and that the u. s. dollar is a favored safe - haven asset may imply that adverse foreign demand shocks have a particularly strong effect on the value of the dollar, effectively transmitting the weakness to the u. s. economy. 11 in turn, u. s. activity and inflation appear to be importantly influenced by these exchange rate movements. in particular, estimates from the frb / us model suggest that the nearly 20 percent appreciation of the dollar from june 2014 to january of this year could be having an effect on u. s. economic activity roughly equivalent to a 200 basis point increase in the federal funds rate. interestingly, it appears that this effect showed through in decreased business investment activity and stagnant manufacturing output, while the anticipated effect on net exports may have been somewhat dampened by depressed demand for imports

the world economy, posing new challenges for japan's economy. external imbalances and trade friction led to the currency re - alignment of the plaza accord in 1985. this put deflationary pressures on japan's economy, while making traditional segments of our economy obsolete. in order to fend off the deflationary forces, japan made full use of macro - economic policies. the government stepped up fiscal spending to boost domestic demand. the bank of japan ( boj ) eased monetary policy for an extended period of time, consequently fuelling the rapid boom in the economy. together with various structural factors, these expansionary policies spawned distortions in japan's economy. to name just a few examples, we saw a nation - wide surge in resort area development at the expense of our green environment. we embarked on the re - development of metropolitan tokyo to make it an international financial hub, but with little coherent strategy in hindsight. fiscal profligacy by the government, which i referred to just a few seconds ago, resulted in the building of local roads and ports barely used by travelers - a classical faux pas of pork - barrel politics. such economic frenzy generated irrational growth expectations, further prompting excessive investment in both real and financial assets. as you know, the upshot of this euphoria was the asset bubbles and their subsequent bursting. all these episodes point to one thing : despite the substantial changes in its external circumstances, japan was not able to depart from the development model it cherished during the economic catch - up period. we had many discussions about how to reform our system in the face of the headwind against japan's economy after the plaza accord, but we did not follow our words with action. put differently, it was a reform by word, not in deed. after the collapse of the economic bubbles in the early 1990s, we finally learned that every boom must evaporate some time. an aging population and declining birth rate also forced us to acknowledge the need to revamp our modus operandi so that we could remain viable in global competition. this perception shift marked the beginning of the long adjustment phase from the mid - 1990s - a harrowing decade when japan's private and public sectors tried to reinvent themselves. the corporate sector tried hard to get rid of the negative legacies of the bubble era - that is, excesses in production capacity, labor, and debt. although hard hit by falling employment and wages, the household sector endured relatively well during this