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Interview: Naoyuki Shinohara

May 13, 2013

Many investors have been feeling a renewed sense of optimism. They like what they're seeing from the US economy and from corporate earnings in Japan. But the Deputy Managing Director of the International Monetary Fund warns there are still miles to go. NHK WORLD's Reiko Sakurai sat down with Naoyuki Shinohara to find out what he thinks the challenges ahead are for the global economy.

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Naoyuki Shinohara

Deputy Managing Director, IMF

IMF expects the global growth to be around 3.3 percent this year, and picking up to 4 percent next year. But Shinohara points out that the level of growth is relatively low compared to the pre-crisis period when it was recording more than a 5 percent growth.

"The global financial market conditions have improved quite a lot since last autumn, over the past half a year or so. But the problem is that it is not translated into the real economy. And the growth rate is still low and not enough to create jobs, enough for people who have lost employment over the past few years. "

Shinohara notes that Europe remains the main source of concern. He says despite steps taken by leaders in the region, a quick fix might be hard to expect.

The problem started with so-called periphery countries in the Eurozone. Now it is now extended to the core economies. ...The basic root of this problem is the banking sector issue. The repair of the banking sector is urgent: not enough efforts has been made to recapitalize the banks, not enough efforts are made to create enough monetary union.. some degree of fiscal union is also necessary... Too much dependence on monetary policy has side effects. And ECB has been doing a lot of efforts to provide liquidity to the market. There is not much room left anymore to further ease the monetary condition in Europe. So more people are talking about the fiscal side now, whether the pace of the fiscal consolidation is correct or not...."

On Japan, the IMF welcomes efforts to pull the nation out of deflation. But Shinohara warns that the country needs a credible fiscal consolidation plan after having implemented a large-scale stimulus.

"The problem of the combination of aggressive monetary easing and fiscal stimulus is that it could lead to so-called fiscal dominance. The market would eventually focus on deficit financing. That means that the government debt financed by the central bank ...which could lead to a sharp increase in interest rates...which could lead to difficulty in defunding the government debt.

Turning to China, Shinohara says the country needs to implement more reform to address middle-term risks.

"The Chinese government has been trying to transform the economy from investment-dependent economy to a consumption-dependent economy, but unfortunately, we have not seen the signs...As the time passes, the return on investment will decline – it has been declining over the years – but it will continue to decline... If you depend too much on investment, the economy will have to depend on lower-return investment or, there is a danger that China would be in so-called middle-income trap.I think the concern is the structure, the pattern of growth within China.We have been focusing on the external balance of China and too much surplus in the current account, but I guess now it's time to focus more on internal imbalance in China."

Shinohara points out that even the fast-growing emerging economies face potential risks... stemming from quantitative easing in advanced nations to spur growth.

"The money is finding places to go, and emerging economies are attractive place for investment. That is why, depending on the market sentiment, money flows into those emerging economies. Capital flow to those economies itself is good for the growth of the economy...But from a macroeconomic viewpoint, it is a headache. If, especially if the capital flow becomes volatile, the exchange rate would suddenly appreciate, capital flows in, and for example, real estate market overheats. So that is one of the areas that some of the emerging markets are already experiencing, and they have a tough time, a tough fight to carry out."

When asked if the global economy has improved enough to say that the world has become a safer place to live in, Shinohara says that the outlook is still uncertain, and thus more coordination necessary.

"I guess there are two words that I want to describe the current situation. The first one is interconnectivity, the second one is multi-polar system...The interconnectedness among countries around the globe is making a huge difference to our living: everyone is one click away, and all the activities that is happening in other countries could have impacts on your country.In the past, US was a dominant force, and in a sense, the global economy, global society, was kind of stable. And the control of the United States, good or bad, was a fact. Now, the relative power of the US is declining gradually. So we are faced with a multi-polar world. That sometimes means chaos. That makes it more important for us to work together, to get to know each other, to get to know what the others are doing, what are the impacts others have on you, what are the impacts your policies will have on others... so those coordination and the discussion among countries are becoming more and more important.


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