Heizo Takenaka

State Minister in charge of Economic,

Fiscal and IT Policy

　

The deceleration of the U.S. economy is now manifest. Economic slowdown, coinciding with uncertainty over the Bush Administration's economic policy directions, is behind growing concern about the global economy.

An important point to bear in mind when sizing up the U,S. economy right now is that this is the first recession under the New Economy (the first"digital recession"), and its basic mechanisms are not yet well understood. However, the economic adjustment will basically be mild and will come in for a "soft landing."

　Overall, the prevailing opinion is that the U.S, economic downturn will be mild. At the world economic forum held in Davos, Switzerland earlier this year, experts from around the world also agreed that the slack-off would not be severe and that that it could be controlled appropriately through Federal Reserve Bank monetary policies.

　The basic factor behind this reasoning is that many experts believe that the IT (information technology)revolution built into the U.S. economy is an extremely strong new growth mechanism. Although the full impact of the IT revolution on the economy is not yet entirely clear, some important evidence has emerged. According to frequently cited research findings by FRB economists, 72 percent of productivity growth in the United States is IT-driven. Performance at this level suggests that the fundamentals of the U.S. economy are very sound.

However, we must bear in mind that the current economic adjustment is the first so-called "digital recession" under the New Economy. Since we lack sufficient knowledge and experience of digital recessions at this point, basically two different and contrasting views prevail.

　One is that in a society benefiting from the IT revolution, thorough monitoring of information makes it possible to perform continual, real-time adjustments in the economy, and that this can flatten the curve of the economic cycle. Inventory control technology has certainly vastly improved with IT advances, allowing producers to tailor production to sensitively reflect sales trends and thereby helping reduce fluctuations in the inventory cycle.

　The other view is that since it is difficult to evaluate technology in an IT-based society, expectations of new ventures vary wildly, with the end result that the stock market has become much more volatile than before. If large-scale asset deflation occurs, economic downturn will inevitably be correspondingly large and could deepen the economic trough all the more. A digital recession, in other words, by its very nature calls for vigilance.

The second important point to watch is that the U.S, economic slowdown will have a strong impact on Asian economies, which have become increasingly dependent on IT-related industries.

　After their wholesale downturn in the wake of the currency crisis of 1997, the Asian economies recovered rapidly beginning in 1999 (the so-called "V-curve"recovery). The recovery was due to changes in fiscal policy and strong exports, but another important factor is that production in Asian countries had by then shifted to IT-related industries. IT products now account for half the exports of the Philippines, Malaysia and Singapore, among others, and developing Asian countries today are globally-important manufacturing bases for such products.

　In that sense, the V-curve recovery of the Asian economies was moving in step with the strong IT-led U.S. economy. At the same time, this means that the Asian economies will probably experience considerable fallout from adjustment phases of the U.S. economy, because they have become even more dependent on the United States than before.

The third point to note is uncertainty over what policies the new Bush Administration's economic staff will adopt-in other words, the direction of American macroeconomic policy is unclear. One of the arguments supporting the view that the economic adjustment will be relatively minor is the generous leeway the government has in formulating policy. The FRB has already lowered interest rates twice this year and further monetary loosening will probably occur sooner or later. Prior to the first rate cut of 2001, the FRB had raised interest rates six times, so this means that the government has much room to maneuver. It also has a relatively free hand in fiscal policy amid concerns about an expanding surplus. As a result, some observers believe that even if a recession occurs in the United States, it will be a "managed" one.

　Although there is broad support for this view, the fundamental problem is that the Bush administration has still not defined its economic policy. Significantly, many of the major figures in the Bush Administration are from military backgrounds, indicating the great weight this government places on security issues. Indeed, except for presidential aide Bruce Lindsay, known for his radical supply-side, monetarist views, no notable economic experts are on board. At this point, what policies the new Bush Administration will adopt and on what sort of timetable they will be implemented is simply not known.

　Domestic policy in Japan should be managed on the assumption that the digital recession in the United States involves a number of unpredictable factors. The "digital recession" concept applies to some extent to the Japanese economy as well. This is because although the Japanese economy has not again slipped back into a recession, Iike the United States it is now experiencing a slowdown due to worsening prospects in the IT sector. Rather than temporary measures to boost domestic demand (public works projects, etc.), I believe the best prescription in this case is to adopt policies to foster a thoroughly competitive environment that will elicit an unremitting stream of corporate renovation.