The global economy has yet to overcome the effects of the financial crisis, Takatoshi Kato, former deputy managing director of the International Monetary Fund, said in a recent interview.
The global economy was able to avert a serious downturn, thanks to strong monetary and fiscal stimulus, said Kato, who was deputy IMF chief at the time of the crisis.
Since then, emerging economies have been an engine of global growth, he said. But now, the global economy is facing a headwind and there is no clear engine for growth, he said.
The U.S. economy is not bad but has not yet achieved the level of sustained job growth needed to push down the jobless rate, said Kato, now president of the Japan Center for International Finance.
Developed nations are shifting their focus toward restoring fiscal health and away from stimulus efforts, though it is difficult for fiscal consolidation to proceed in a desirable manner, he said.
Kato said that Japan is getting close to emerging from deflation. The inflation rate is entering positive territory — pushed largely by rising energy prices driven by the weakening of the yen — though whether the rate will reach 2 percent is another question, he said.
Asked about the government’s plan to raise the 5 percent consumption tax to 8 percent in April, Kato underlined the need to adopt policies to cushion its impact.
Risks involving the tax increase can be foreseeable to some extent, but those accompanied by any decision not to raise the tax are unpredictable, he said.
Kato said efforts to create a mechanism designed to prevent a financial crisis from occurring are making significant progress. But he said Japan should also look carefully at the possibility of creating financial bubbles. There is no guarantee that a crisis will never happen, he said.