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Monday, Oct. 16, 2006

JAPANESE PERSPECTIVES

Global imbalances, economic and political, must be rectified


As countries throughout the globe undergo radical economic changes from the impact of globalization, there exist two major imbalances in the world today.

The first imbalance is of course the one arising from the huge current account deficits the United States continues to run. It has not created serious chaos at the moment because the massive influx of funds from around the world allows the U.S. to make up for the deficits. However, there is no guarantee this will continue, given the continuing expansion of those deficits each year.

There are three factors that need to be considered when gauging the risks these imbalances pose to the global economy.

First of all, the U.S. is increasingly dependent on funds from oil-producing countries, rather than from Japan and the rest of Asia. Between 1998 and 2005, the current account surpluses in the Middle East rose by $221.7 billion, while China's rose $127 billion, Russia's $86.4 billion, and Japan's $44.8 billion. During the same period, the current account deficit of the United States expanded by $590.9 billion.

Nobody knows whether economic, political or religious events will reverse the flow of funds into dollar-denominated assets, but it is certainly a possibility, and it could happen at any time.

The rising euro interest rates and the greater presence of the European currency must also be taken into account.

On Oct. 5, the European Central Bank raised its policy interest rate by 0.25 point to 3.25 percent. It was the ECB's fifth hike since December, and ECB President Jean-Claude Trichet has not ruled out additional rate hikes. The narrowing interest rate gap with the U.S. could cause the euro to appreciate further against the dollar.

The euro's presence is increasing steadily around the world. China and other countries have reportedly been shifting to the unified currency in their most recent foreign currency acquisitions.

Other factors that deserve attention are the prospects for the U.S. economy and its interest rate gap with other economies. If a slowdown in the U.S. triggers a decline in interest rates, the dollar would lose its power to attract overseas funds.

The second major imbalance concerns the structure of international organizations, such as the United Nations and the International Monetary Fund, that were created by the victorious Allied Powers after the end of World War II.

A good example of this is the imbalance between the veto powers of the permanent members of the Security Council and the financial contributions they make to the U.N.'s finances. Japan and Germany finance 19.5 percent and 8.7 percent of the U.N.'s budget, respectively. The United States chips in 22 percent, but the contributions of the other four members -- Britain, France, China and Russia -- stand at a mere 6.1 percent, 6 percent, 2.1 percent and 1.1 percent, respectively.

At the IMF, the quota for the U.S. is 17.4 percent. But for the rest of the permanent members, it's 5.03 percent for Britain, 5.03 percent for France, 2.98 percent for China, and 2.79 percent for Russia. Here again, Japan's quota is 6.24 percent and Germany's is 6.09 percent, both higher than those of the veto powers aside from the U.S.

Quotas for rapidly developing powers Brazil and India are 1.42 percent and 1.95 percent, respectively. Since the founding members retain the power originally accorded to them, the power structures in place today at these international institutions do not reflect the changes that have since taken place.

Of course, Japan prioritized economic reconstruction after WWII, but today it must review its policy of choosing butter over guns.

The correction of these two imbalances should be on the policy agenda of Prime Minister Shinzo Abe.

Teruhiko Mano is a professor at Seigaku in University Graduate School.


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