The outlook for the world economy is improving. The most recent World Economic Outlook, issued last week by the International Monetary Fund, forecasts 2.3 percent growth this year, and should climb to 3.4 percent in 2000. IMF First Deputy Managing Director Stanley Fischer opined earlier this week that “the global financial crisis is easing.” Those are encouraging words, but caution remains important: The recovery is fragile and a reversal is still possible.
The chief problem is uneven growth. The United States economy continues its spectacular run, but there is growing concern over what appears to be a bubble in the stock market. If it bursts, U.S. demand would slow and there are no signs that Europe or Asia — Japan in particular — is prepared to pick up the slack.
The meeting of finance officials of the Group of Seven leading industrial countries, held earlier this week in Washington, echoed the IMF assessment and called on Japan to “use all available means to support strong domestic demand-led growth.” That message has been repeated by officials at the IMF and within the U.S. government. Prime Minister Keizo Obuchi will hear it during his summit meeting with U.S. President Bill Clinton next week.
Japanese officials are understandably defensive at the finger pointing. The government has introduced a record stimulus package, moved to shore up ailing financial institutions and offered assistance to shaky economies in Asia. Japan is getting its house in order and preparing for a return to growth this year.
Nonetheless, there is more to the G7 message than a search for scapegoats. Stimulating the economy is vital, but it is only a first step. Just as important is the need to restructure. Deregulation and the introduction of mobility and flexibility into rigid labor and asset markets will prepare the country for growth over the medium and long term. The real danger for Japan — and the world economy — is that a return to growth will kill off any incentive to embrace deep-seated reform. A serious effort in that endeavor is the best response to charges that Japan is not pulling its weight.
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