By Steven K. Beckner
TOKYO (MNI) – Industrialized nations are “operating well short of
potential” because monetary policy can’t offset the “limited scope” for
fiscal stimulus, Federal Reserve Vice Chairman Janet Yellen said
Thursday.
Although Asian economies are growing more rapidly, they need to
depend less on exports and more on domestic demand, said Yellen,
speaking ahead of the annual meetings of the International Monetary Fund
and World Bank.
Japan needs to increase its growth potential through higher
productivity and increase in labor force participation, she said in
remarks prepared for delivery to the Institute of International Finance.
She steered clear of commenting on future U.S. monetary policy a
month after she joined her colleagues on the Fed’s policymaking Federal
Open Market Committee in launching a third round of quantitative easing
and further delay to hikes in the federal funds rate to at least
mid-2015.
Yellen said “most advanced economies are growing very slowly and
operating well short of potential.”
In fact, she added, “by historical standards, their performance is
even more anemic that we would have expected, given the nature of the
previous recession.”
Yellen said “this shortfall likely reflects the unusually limited
scope for fiscal stimulus at present, which very accommodative monetary
policies have not been able to fully offset.”
“The recovery from the global recession of emerging market
economies, especially in Asia, has been more robust, but even these
economies are slowing in the face of weak global demand, and they would
benefit from further progress toward a more balanced model of growth led
by domestic demand,” she said.
Although Japan was recovering more rapidly than the other advanced
economies before it was hit by an earthquake and tsunami last year, “it,
too, faces issues with the longer-run sustainability of its debt as well
as other structural challenges that need to be addressed,” she said.
In contrast to the U.S. and other advanced economies, “emerging
market economies, particularly in Asia, recovered sharply from the
global downturn, in part by using countercyclical fiscal and monetary
policies to bolster domestic demand,” Yellen said. “(T)he recovery in
the Asian economies appears on pace with what we might have expected,
given the severity of the previous recession. This swift recovery has
not only benefited Asia, but the global economy as well.”
“Lately, however, the momentum in the emerging Asian economies has
weakened, in part as their exports to Europe and the United States have
slowed,” she continued, noting that “exports to China from other
countries in the region have also weakened, partly because of the
unwinding of China’s earlier stimulus programs, but also because China’s
exports to the advanced economies have slowed, thus lowering its demand
for imported parts and components.”
Yellen said that, for now, “emerging Asia is offsetting weakness in
external demand through accommodative monetary and fiscal policies,” but
she said that can’t last.
“Ultimately, it would be desirable, both for the region and for the
global economy, if emerging Asia were able to rely less on temporary
policy stimulus and more on a fundamental rebalancing of growth toward
domestic demand.”
While there has been some progress in this direction, she said
“some of this adjustment likely reflects cyclical factors, and,
moreover, the aggregate current account of emerging Asia remains
substantially in surplus.”
Yellen said “greater reliance on domestic demand would not only
help shield Asia’s economic growth from the weakness in the advanced
economies; it would also boost the well-being of its citizens by
enabling them to consume a greater share of the output they produce.”
Besides, she said, “transforming emerging Asia into an independent
engine of global growth would put the global economy on a much surer
footing, thus helping to achieve the Group of Twenty nations’ commitment
to strong, sustainable, and balanced growth.”
As for Japan, Yellen said it “faces fiscal and demographic
challenges similar to those of other advanced economies in Europe and
the United States.”
“Japanese government spending helped propel the economy’s
bounceback from recession, but it has also added to public debt, which
the International Monetary Fund now projects will rise to 237% of gross
domestic product this year, the largest among the major advanced
economies,” she noted.
“Along with this high debt, aging of the population and slow GDP
growth pose important concerns for fiscal sustainability,” she said.
Yellen said that so far “the savings of Japanese household and
firms have been more than enough to finance the government deficit;
indeed, interest rates on government debt have fallen to near record
lows.”
“Accordingly, Japan, like the United States, has the scope to carry
out fiscal consolidation plans that address long-run sustainability
issues without endangering near-term growth prospects,” she went on,
adding that “policymakers in both Japan and the United States face the
challenge of designing policies that provide a credible commitment to
medium-term deficit reduction without disrupting the fragile recovery.”
She said medium-term deficit reduction plans, once put in place,
“should help reduce uncertainty and boost household and business
confidence.”
But that’s not all Japan needs to do, according to Yellen.
“Japan would also benefit from measures to increase its potential
growth, which is generally estimated to have fallen to less than 1% and
could decline further as population aging progresses,” she said. “It is
widely believed that easing regulations could promote faster
productivity growth, particularly in the services sector.”
“Declines in the working-age population also make it desirable to
boost labor force participation,” she said. “Higher employment and
faster productivity gains would help to boost economic activity, enhance
fiscal sustainability, and restore Japan’s contributions to global
economic growth.”
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