Japan's Stunning Turnaround Can't Fix World Imbalances

by: SA Editors

Morgan Stanley's Chief Economist Stephen Roach asks whether Japan can lead the way in the rebalancing of a still unbalanced global economy. Excerpts from his answer:

On the surface, Japan’s gathering recovery is good news for an unbalanced world. And it comes just in the nick of time. With the asset-dependent American consumer starting to fray around the edges as the US housing market cools, a restarting of the growth engine of the world’s second-largest economy is an especially welcome development.

Yet, ironically, Japan’s long-awaited economic recovery may do little to temper the world’s largest and most serious imbalance -- America’s gaping current account deficit. That’s because American exporters have suffered a stunning loss of market share in Japan to China’s ever-ubiquitous producers. As a result, the import content of recovering Japanese domestic demand seems likely to be made increasingly in China rather than in the US.

This underscores what has long been the single most worrisome aspect of America’s current account imbalance -- that there is little hope for a fix from the export side of the equation. With US imports currently running nearly 60% greater than exports, an export-led fix for the US current account problem was always a stretch...

Japan’s turnaround is nothing short of stunning. As the momentum of its economic recovery builds, the world economy will benefit from a long-overdue restarting of another growth engine. But don’t count on Japan to fix the world’s imbalances. That’s a task that remains very much in the court of the most unbalanced economy of all -- the United States.

See Roach's full essay.