Dark Clouds Looming over the Global Economy

It can be said that the global economy basically experienced a state of steady expansion over the last five years. Overcoming the events like United Kingdom's withdrawal negotiation with the European Union (Brexit), the inauguration of President Trump in the United States and political unrests in continental Europe, the global economy is still growing nearly 4% in real terms.

At this stage, however, there is even greater concern over the future. It goes without saying that the protectionist policies taken by the United States are at the root of this unease. Particularly the U.S. and China continue their brinkmanship in the expanding scope of protective tariffs imposed on one another. Reflecting such developments, share prices are falling and yuan is weakening in the Chinese financial market.

Protective tariffs will surely cause imported goods prices in both countries to rise. Since the global economy experiences continued comparatively high growth so far, prices of primary commodities such as crude are already inching upward. The protective tariffs will place additional upward pressure on prices, and subsequently deal body blows on economic activities in both countries.

Moreover, the U.S. economy lastly bottomed out in mid-2009 and the current expansionary period has already extended over quite a long time. The U.S. inflation rate goes up to 2% which is targeted by the monetary policy and the labor market is at around full employment. Corporate earnings are also strong, with share prices reaching their historical high. Against these backgrounds, the policy interest rate is steadily rising and higher interest rates in the U.S. have precipitated an outflow of funds from some emerging countries. Countries such as Argentina and Turkey faces currency devaluations and destabilizing economies.

Japan will not be able to escape from the negative effects of lower growth in the U.S. and China and of economic downturns in some emerging countries. It is not simply because exports to these countries would decrease but also because, since globalization of the supply chain has accelerated even further, a drop in products exported from China to the U.S. would lead to falling component sales to Chinese exporters from Japanese firms. This indirect effect could never be ignored. When the previous global financial crisis hit, even though Japan's financial systems did not accumulated imbalances, the economic bubbles bursting in the U.S. and Europe had an enormous impact on the Japanese economy. In fact, Japan's real economic growth rate in 2009 was -5.4%, recording greater minus than the -2.8% in the U.S. and -4.2% in the U.K.

As this history illustrates, there is a risk that lower economic growth in the global economy could spell considerable pain for Japan, where the potential growth rate is not so high in the first place. Of course, it is still possible that trade negotiations between the U.S. and China could end up with a positive outcome and Brexit be implemented in an orderly fashion. Still, what is undeniable is that the global economy entered a new phase which is different from the past. Unfortunately, it is not possible to make predictions as accurately as the weather forecast with regard to when the current dark clouds in the global economy might turn into a true typhoon but it is better for Japanese firms to start bracing for possible heavy rains and strong winds in the future and to make preparations in order to react quickly when a storm actually comes.