On the Rebound? America and Japan
Image Credit: Offical White House Photo by Pete Souza

On the Rebound? America and Japan


Nicknamed “Dr. Doom,” Nouriel Roubini was credited with predicting the U.S. housing bust and global financial meltdown years ahead of the crisis. Fast forward to 2013, with the world economy still struggling, and the American economist’s latest prediction is the U.S. economy riding to the rescue, aided by Japan’s “Abenomics.”

Has the man once described by Fortune magazine as a Cassandra turned sage got it right again?

Writing in Britain’s Guardian, the New York University professor said America could be a “beacon of hope” in a fragile global environment, with the risks ranging from the eurozone’s collapse to China’s myriad imbalances and the “over-hyped” faith in the BRICs (Brazil, Russia, India and China).

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

The eurozone’s problems of low growth, loss of competitiveness and high debt levels have not been resolved, he warned, with the “grand bargain” between core and periphery nations at risk of breaking down due to “bailout fatigue” in the former and “austerity fatigue” in the latter.

China bust?

Despite a relatively smooth leadership transition, Roubini noted that the world’s second-biggest economy remained, as described by former Chinese Premier Wen Jiabao, “unstable, unbalanced, uncoordinated and unsustainable.”

“China's problems are many: regional imbalances between its coastal regions and the interior, and between urban and rural areas; too much savings and fixed investment, and too little private consumption; growing income and wealth inequality; and massive environmental degradation, with air, water, and soil pollution jeopardizing public health and food safety,” he said.

While the new leadership has discussed changes, Roubini said the power of vested interests in state-owned enterprises (SOEs), provincial governments and the military could prevent reform, leading to a hard landing in “late 2014.”

The former Clinton administration adviser said other emerging economies outside the BRICs may perform better in the decade ahead, including Indonesia, Malaysia and the Philippines.

Roubini also praised the “economic experiment” of Japanese Prime Minister Shinzo Abe to restore confidence and boost growth in the world’s No. 3 economy through aggressive monetary and fiscal expansion, structural reform and free trade.

However, he cautioned that Abenomics also had its challenges.

“It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague. Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment,” he said.

Captain America?

Turning to the United States, the famously bearish economist was more upbeat, pointing to an improved housing market, lower energy costs from the shale boom, a manufacturing resurgence and aggressive quantitative easing by the Federal Reserve.

But even in his adopted homeland, he warned of risks from high unemployment and household debt, the fiscal drag from rising taxes and spending cuts, and “dysfunctional” politics.

It all pointed to a mixed outlook, with the U.S. economy “in the best relative shape” followed by Japan, the eurozone and Britain mired in recession, and the growth of emerging economies outside the BRICs insufficient to turn the tide.

Financial Times columnist Martin Wolf added to the caution over China, saying the question was not about its downturn, but whether it would occur “smoothly or abruptly”.

According to Wolf, Chinese economists have predicted a decline from double-digit growth rates to 6.5 percent a year from 2018 to 2022, due to the “middle income trap” or simply the “natural landing” that other industrializing economies such as Japan and South Korea previously ran into.

“As the experience of Japan has shown, managing a shift from a high-investment, high-growth economy to a lower-investment, lower-growth economy is very tricky,” he said.

On Thursday, financial markets welcomed the Bank of Japan’s move at new governor Haruhiko Kuroda’s inaugural policy meeting to “take all the policy measures imaginable” to reach a 2 percent inflation target.

The BOJ’s action to double holdings of Japanese government bonds and exchange-traded funds over two years and expand purchases of real-estate investment trusts saw the benchmark bond yield hit a record low, while the yen declined and stocks gained.

At around 7 trillion yen (US$74 billion) a month, the BOJ’s bond buying exceeds even the Fed’s US$85 billion, given Japan’s economy is a third the size.

Meanwhile, the U.S. recovery continues apace, with growth forecasts for the March quarter above 3 percent, factory orders improving, and stocks hitting new highs.

Should Roubini’s forecasts prove accurate, the world economy’s old order may be about to reassert itself.

Sign up for our weekly newsletter
The Diplomat Brief