World financial markets started this year with violent fluctuations in stock prices and foreign exchange rates, producing uncertain prospects ahead.
This pours cold water on market prospects that the world economy is expected to recover gradually, driven by business expansion in the United States.
Can the world economy pursue a path toward sustainable, stable growth? This year will mark a major turning point for the global economy.
The so-called reverse oil shock caused by sharp drops in crude oil has been shaking the world market.
The benchmark crude oil price, which had stood at around $100 per barrel until last summer, has accelerated its downward trend to plunge below $50.
The low price of crude oil is supposed to essentially affect the world economy favorably. But a sense of uncertainty is growing in the market as oil demand was perceived to be declining due to slack business in emerging economies and elsewhere.
There are strong concerns the economies of Russia and other oil-producing countries will be dealt a blow by the low oil prices and their adverse effects will spill over into Europe and elsewhere.
Speculation of money overflowing in the aftermath of monetary easing by Japan, the United States and Europe has been spurring fluctuations in the market.
Countries must strengthen their monitoring so that the chaos in the markets will not adversely affect economies.
The biggest focal point in forecasting the global flow of funds is the direction of U.S. monetary policy.
The U.S. Federal Reserve Board ended its monetary easing policy last autumn and is believed to be planning to shift in the middle of this year to raising interest rates that have effectively been set at zero percent.
If prospects of an interest rate hike gain currency in the immediate future, the money that flew into emerging economies due to the monetary easing is feared to flow back to the United States, threatening to cause steep declines in the currencies and stock prices of emerging countries.
To prevent such a crisis, we suggest the Fed present “forward guidance” in great detail and repeatedly before carefully carrying out its strategy to exit from monetary easing.
The European economies face an economic slump and price stagnation. Many analysts say Europe will fall into deep deflation similar to Japan’s.
The European Central Bank is poised to adopt a quantitative easing policy by purchasing government bonds issued by its members.
But Germany and some other countries oppose the ECB’s stance on the grounds that the central bank would have to make up for the fiscal deficits of the southern European countries that did not carry out structural reforms.
There are also many practical issues including the amount of national bonds the central bank would have to buy respectively from each of these countries, which differ in terms of creditworthiness and interest rates.
European countries should reorganize their cooperative system and do their utmost in avoiding further deflationary trends.
Particularly worrisome is a political movement in Greece, which has been an epicenter of the European debt crisis.
The Coalition of the Radical Left, an opposition party opposing fiscal austerity measures and the Eurosystem ― the monetary authority of the eurozone ― is expected to make a great advance in the general election scheduled for Jan. 25 in Greece. If it does, there is a real possibility of Greece leaving the eurozone.
To protect the credibility of the euro, it is important to keep political developments in Greece from affecting Italy and other eurozone countries beset with fiscal woes.
We should also pay special attention to China’s economic trends, which had led the growth of the world economy. The economic slowdown in China is accelerating due to plunging real-estate prices and sluggish capital investment by businesses.
China is likely to lower the country’s economic growth target to about 7 percent for this year from about 7.5 percent, set until last year.
It seems to be aiming to make a soft-landing to a stable economy from its previous rapid growth, by shifting an economy driven by public works and real-estate investment to one led by private consumption.
If China falls into a serious economic slump, it will have a great impact on other economies as it is the world’s second biggest economy after the United States’, as well as being a major trading partner and investment destination for many countries.
We should keep a close eye on China’s ability to smoothly transition its economic structure.
There has been active discussion among economists since last year over the modality of capitalism, which also has a serious bearing on the future course of the world economy. The debates were triggered by “Capital in the Twenty-First Century,” a best-selling book authored by French economist Thomas Piketty.
By analyzing more than 200 years worth of economic data from major countries, he concluded that the rate of returns on capital exceed the rate of economic growth. This can be construed as meaning capital owners will become richer with an ever-increasing concentration of wealth, far more quickly than the rest of the population will be able to enjoy affluence thanks to economic growth.
While the book has been much discussed in the United States ― a country facing serious issues of economic inequality ― some skeptics say the author cherry-picked favorable data to reach his conclusions. Further analysis of the book is needed.
Piketty also calls for a global wealth tax on the wealthy to prevent inequality from expanding further. Yet it is unrealistic for countries facing different situations to impose higher taxes on wealthy people en masse.
Heavy taxes on the rich may discourage their motivation to work, hindering overall economic growth ― the crux of the matter.
(Editorial, The Yomiuri Shimbun)
(Asia News Network)