The 20th RIETI Highlight Seminar

How to Surf the Waves of Financial Globalization: Will the ongoing massive U.S.-triggered stock losses around the world lead to yet another crisis? How should we address global financial instability and what does the future hold for the global economy?


  • Time and Date: 14:00-16:00, Monday, December 10, 2018
  • Venue: RIETI's seminar room (METI Annex 11th floor, 1121), 1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo


Ensuring sound economic management amid the waves of globalization poses a critical policy challenge for governments around the world. In the 20th RIETI Highlight Seminar, we had two specialists in international finance—ITO Hiroyuki, an economics professor and department chair from Portland State University, and RIETI Senior Fellow Willem THORBECKE—as lecturers. Global financial markets are in turmoil triggered by steep falls in U.S. stock prices, following a similar pattern to what happened in early 2016. Against this backdrop, we discussed the following questions: Is a new crisis unfolding? How should we assess the current situation? Are there any ways to forestall the crisis?

Opening Remarks

NAKAJIMA Atsushi (Chairman, RIETI)

Ten years have passed since the breakout of the global financial crisis triggered by the collapse of Lehman Brothers in 2008. The crisis has had various lasting impacts on the world economy that has become increasingly interlinked amid globalization. While scars from the Lehman collapse have healed, globalization has proceeded and is continuing to proceed. Today, not only economic activities but also capital is being globalized, making it all the more challenging for governments around the world to manage their economic policies. Furthermore, we are now witnessing significant turbulence in stock markets, which started in the United States and spread to the rest of the world, and some people are beginning to see the real possibility of another crisis. Keeping these observations in view, we will consider how challenging it can be to surf the waves of globalization and ensure sound economic management, and then we will explore ways to navigate through this difficult time.

How to Surf the Waves of Financial Globalization

ITO Hiroyuki (Visiting Fellow, RIETI / Professor of Economics, Portland State University)

Unstable financial markets

Recently, New York stock prices, such as the Dow Jones Industrial Average, have been quite volatile, sending the world's stock markets into jitters. Also, there is a series of political and geopolitical risks developing around the world. These include the U.S.-China trade war, the possibility of a no-deal Brexit, and Italy's growing fiscal deficit which might again question the credibility of the euro.

There are also economic risks. The first is the flattening of the yield curve. That indicates that short term interest rates are most likely to come down while the U.S. economy weakens going forward. Regarding the possibility of a slowdown in the U.S. economy, we need to keep in mind that the U.S. economy has been in a state of overheating for the past several years. That is the reason why the Federal Reserve began to tighten monetary policy in December 2015, raising the Federal Funds Rate from zero to a range of 2% to 2.25% over the last three years. Another economic risk is that the price-earnings ratio (PER) of U.S. stocks has been at a level well above its historic average, hovering around 30, leading market watchers to expect stock prices to continue to be on a downward trend.

My personal view is that global financial instability—if it does ever occur—will more likely start in emerging market economies (EMEs) than in the United States or other developed countries. This is because many firms in the EMEs hold a massive amount of U.S. dollar-denominated debt. That means if U.S. interest rates rise and the dollar appreciates, EME currencies would depreciate against the dollar, which would increase debt burden in terms of domestic currency for the EME debtors. If that ever happens, it could lead to financial instability with many companies forced into bankruptcy and banks facing accumulating bad loans. Considering that developing economies now account for 60% of the world's gross domestic product (GDP), we cannot rule out the possibility that a fire that starts in a developing country engulfs developed countries.

Financial liberalization and developing economies

To understand the current situation of the world economy, let me talk about the experience EMEs had with respect to financial liberalization because it is closely related.

After the Bretton Woods system collapsed in 1973, developed countries (especially in the U.S.) first started liberalizing financial markets in order to provide a greater variety of financial instruments. It was followed by developing countries in the late 1970s. Latin American countries implemented drastic financial liberalization in the late 1970s, and so did East Asian economies in the early 1990s. Financial liberalization usually leads to an increase in foreign capital inflow, which can set off an investment boom and eventually a bubble-like situation. A resultant economic upswing is usually followed by a deterioration in the current account balance. Also, a large portion of cross-border financial flows to developing countries is usually denominated in the dollar, not in their national currencies, and therein lie the potential risks.

A rise in U.S. interest rates resulting from the Federal Reserve's monetary tightening or an appreciation of the dollar (which can arise for a variety of reasons) could overvalue developing countries' currencies, prompting massive speculative attacks on them. The central banks in such a situation would try to protect the value of their national currencies by selling foreign reserves (i.e., U.S. dollars) and buying their own currencies. However, in most cases, these countries would plunge into a currency crisis as they lose so much of foreign reserves. Then, the International Monetary Fund (IMF) would step in and provide emergency loans to bring the crisis economy under control. This is the pattern observed in many developing countries' crises including the 1982 Latin American debt crisis as well as the Asian financial crisis in 1997 and 1998.

While financial liberalization makes it easier for capital to flow in, it does also make it as easy for capital to flow out. For a country with open financial markets, it becomes important to have a sufficient amount of hard currency such as the U.S. dollar to maintain the stability of its exchange rate or its economic system. Thus, holding massive foreign reserves serves as insurance that would help in the event of financial instability. The IMF has been playing this role, providing rescue loans to prevent or mitigate crises.

However, because IMF loans come with conditions requiring the borrower countries to implement stringent austerity measures ("conditionalities"), those economies often experience a recession in the post-crisis period. Furthermore, in many cases, the recipient countries tend to think IMF conditionalities reflect the views of the United States or the West, and therefore feel a sense of defeat once they have to accept the conditionalities. As such, after the Asian financial crisis, many developing countries began to avoid relying on the IMF and explored ways to insure on their own by trying to run current account surpluses, keeping the value of their currencies low, and increasing foreign reserves. These policies turned out to be consistent with their traditional policies of achieving exports-driven economic development.

While holding ample foreign reserves can provide insurance for a financial crisis, it can have side effects. Having a large amount of foreign reserves allows a country to print more money. As East Asian countries—most notably China—and oil exporting countries came to accumulate massive foreign reserves in the early 2000s, an enormous amount of money came into the global markets. Such money flows in and out of markets on the global scale, depending on the economic conditions of the United States and other developed countries. An enormous amount of money circulating in the global capital market has translated into a higher risk of financial instability, and thereby increased the importance of self-insurance. However, the more self-insured countries try to be, the more money circulates in the world economy. This in turn increases the risk of financial instability, and ironically the need to insure as well. This paradoxical vicious circle is what we face today.

In fact, in the mid-2000s, a huge amount of money flowed into U.S. and European asset markets, particularly the housing market, creating an economic boom across the developed countries. But then came the collapse of Lehman Brothers in 2008, and the central banks of almost all developed countries adopted zero or negative interest rate policy, prompting massive capital flows from developed countries to developing countries. As a result, the currencies of developing countries appreciated, which triggered investment booms in the EMEs. Taking advantage of the situation, investors borrowed in U.S. dollars and invested in assets in those economies. Furthermore, in 2014, the prices of natural resources and commodities surged and created favorable conditions for resource-exporting countries, adding to the boom in emerging market economies.

Existing Risks

After taking office in 2016, President Donald Trump embarked on massive fiscal stimulus with tax cuts and fiscal spending, making the U.S. fiscal deficit rise. Meanwhile, the Federal Reserve Board (FRB) tightened monetary policy. All of these policies created upward pressure on U.S. interest rates, putting the dollar on an appreciation trend as well. As the real economy is in good shape, domestic demand has risen, deteriorating the current account balance along the way. When U.S. interest rates rise or the dollar appreciates, capital recedes from emerging markets and flows back to the United States and other developed countries, which I think is what is happening now.

The current situation bears a resemblance to what occurred in Latin American or Asian countries that underwent a financial crisis in the past. Worse yet, the prices of natural resources and commodities such as crude oil have gone down, which is detrimental to many emerging market economies. The ongoing situation is imposing enormous stress on their financial systems, putting downward pressure on their currencies. This causes a further increase in their debt burden (in terms of domestic currency), trapping them in this vicious cycle. This is what is happening in emerging market economies. Thus, as long as EMEs borrow in the dollar instead of their domestic currencies, whatever happens in the U.S. economy has a direct impact on them.

There are two reasons why I see little risk of U.S.-initiated financial instability. First, subprime problems such as those observed in 2008 are unlikely to occur. With highly stringent loan screening criteria in place in the aftermath of the subprime crisis, lenders can no longer provide mortgages to less reliable customers, meaning that the mortgage environment is much more secure now (than in the time leading up to the crisis in 2008). Also, there are much fewer mortgage-backed derivatives on the market than before the crisis – they do not appear to have the risk of turning into bad assets any time soon.

Second, even though many predict that the U.S. economy will soon fall into a recession, the real economy remains strong. The unemployment rate is 3.7% as of November 2018, the lowest since 1969, wages are growing at a significant pace, and yet, there is not much inflation. The U.S. economy is far more robust than any other advanced economies including the euro area and Japan.

How should we address the existing risks?

First, we need to understand the nature of the risks accurately. U.S. stock prices will continue to be volatile. Given their relatively high P/E ratio, U.S. stocks will probably remain on a downward trend. However, when we look at the entire world economy, more risks exist on the side of developing countries as I described.

A big difference between the ongoing situation in EMEs and what happened in the 1980s and the 1990s is that very few economies peg their currencies to the dollar. In the event of a financial crisis, an economy with a fixed exchange rate regime would be acutely impacted over a short period of time. In the case of an economy with a floating exchange rate regime, a crisis develops gradually. However, regardless of the type of exchange rate regime, if economic malaise drags on for too long, political stress can build up and lead to a rise of populist leaders. An economic crisis is often followed by political turmoil, whereby people become more receptive to extreme ideas, thus allowing populist leaders to pursue protectionist or nationalist policies, which would only exacerbate the situation.

The current risk to the world economy stems from EMEs' belief that holding massive amounts of dollar assets serves as insurance against a financial crisis. The current overwhelming dominance of the dollar in today's global monetary system has made the global economy subject to the economic and financial conditions of the United States, merely a single country, but at the same time, there is no checking and balancing mechanism on U.S. fiscal and monetary conditions. In the meantime, the euro, the world's second major currency, is still subject to some uncertainty, while the renminbi has not yet grown to become a major international currency. This is where the current global monetary system is weakest. Over the long term, I believe that developing a multi-currency system, one that is dependent on the U.S. dollar, euro, renminbi, and Japanese yen as key international currencies, would put in place a mechanism of checks and balances among the key currency issuers, and that would help diversify the risks.

Surfing the Waves of Globalization: Perspectives from trade

Willem THORBECKE (Senior Fellow, RIETI)

The World Economy in Turmoil

The imbalances causing deep political problems in the United States are valid concerns, but the solutions being offered by President Trump are unproductive and do not make economic sense, like cutting the U.S. trade deficit while running large budget deficits, which stimulates U.S. spending and increases the trade deficit. The expansionary fiscal policies combined with contractionary monetary policies appreciate the dollar and increases the trade deficit. High tariffs interfere with free trade. Uncertain tariffs make it hard for businesses to plan their investments.

When China joined the World Trade Organization (WTO), there was some certainty about international trade, but the uncertainty in the U.S. is very damaging and destructive for the world economy. The current economic situation in the U.S. is very volatile as there is bureaucratic management of trade rather than market-driven management.

East Asia could make a deal with the U.S., where the U.S. maintains open markets, free trade and reduces its budget deficit and East Asia allows exchange rate appreciation, which although painful for Asia, would be preferable to the current uncertain tariff and other policies emanating from Washington. Asian economies' slowdown due to currency appreciation could be offset by investing more in human capital and education. This would rebalance the global economy.

In the past, East Asian economies succeeded as they quickly learned and assimilated technology thanks to a very strong and well-educated human capital resource. As East Asia faces difficulty with new technologies like Artificial Intelligence, human capital investment could help Asia prepare for the future.

The world economy is in turmoil due to a tumultuous stock market, US-China problems, and a tit-for-tat protectionism threatening the world trading system. There is intense competition between Asian economies. For Asia to navigate through difficulties and have a stable economic situation five years into the future, I will focus on Asia's flagship sector, electronics, and look at how it has evolved between World War II and the present and the lessons learned.

How Japan Assimilated Technologies

After World War II, the Japanese economy was in bad shape, but quickly assimilated new technologies and grew and this is how Japan faced the rapid technical change and competition from the rest of Asia.

In 1946, America's Bell Labs invented the transistor. An antitrust suit forced them to make the transistor technology accessible to everyone. Kobe Kogyo signed a license agreement with RCA and became the first company to mass produce transistors. In 1953, Sony signed an agreement with Western Electric to make transistors. In 1954, Sony used this advanced technology to make the first transistor radio that could compete with conventional radios, and paved the way for other Japanese companies to follow.

By 1959, Japan had exported 6 million radios to the U.S. To remain competitive, Sony focused on high-end radios and used transistors to make black and white televisions. In 1968, Sony patented the aperture-grille technology to make premium Trinitron color televisions. Following this, Sony focused on charge coupled semiconductor devices and developed their most-profitable product, camcorders.

In 1976, Japan became the world's leading electronics exporter. By early to mid-80s, Japan became the world's leading semiconductor exporter. The Japanese electronics industry became very successful. Although import penetration was deep, large trade deficits combined with contractionary monetary policies developed in the U.S. This led to currency appreciation accompanied with trade deficits.

In 1985, protectionism skyrocketed in the US. In the 80s, the leading economies of Japan, Germany, Britain, and Canada responded to the protectionism of the US by allowing their currencies to appreciate against the dollar and asked the U.S. to reduce its budget deficit and abandon protectionism.

This "endaka" period (appreciation of the Yen) was very difficult for the Japanese economy, as the Japanese yen appreciated by about 50% and Japanese exporters lost their price competitiveness. Japanese producers transferred factories and labor-intensive production processes abroad and kept producing technologically-sophisticated parts and components in Japan.

Emergence of China and Increasing Uncertainty

Japan's exports of electronic parts and components to East Asia and the Association of Southeast Asian Nations (ASEAN) took off after the Plaza Accord of 1985. To deal with the strong yen, Japan moved factories to Korea and Taiwan. As those currencies had higher wages, Japan transferred production to ASEAN countries. When China joined the WTO in 2001, Japan transferred production to China.

As Japanese and other foreign factories invested in research and development in Taiwan and Korea, the two countries developed strong electronics companies that became the leading semiconductor producers as they were adept at learning and assimilating new technologies. After China joined the WTO, other countries felt confident that China would obey the international norms and wanted to invest in China. A lot of factories moved to China, making it the leading exporter of final consumer electronics goods, the value of which is larger than the next 14 countries combined. Initially, the value-added came from Taiwan, Korea, or Japan, but it now also comes from China. Asian countries engage not only in intense competition but also in intense cooperation.

China's export explosion led to huge imbalances with the U.S. Before the global financial crisis, a lot of capital flowed into the U.S., meaning there was a large current account deficit. This crisis led to a rebalancing with Europe and other countries, but there was no rebalancing with China. Over time, the US deficit with China kept increasing.

China's export explosion displaced the lower middle-class workers involved in manufacturing in the U.S. The workers suffered economically as they were not absorbed into other industries. This was one of the reasons that President Trump came to power as he had said that he would address this politically difficult but legitimate problem of the displacement of the working class in the U.S. However, he addressed it by placing tariffs on a variety of goods, which does not make economic sense and has led to a trade war and economic uncertainty.

The Index of Economic Uncertainty was calculated by Professor Bloom, Professor Davis, and their co-authors, and also by Arata Ito from RIETI. The index increased to high levels with Trump winning the election, with economic and trade policy uncertainty in Japan and elsewhere and Trump's policies leading to trade wars. As businesses faced lots of uncertainty, it became harder to invest. It is much harder to make investment decisions if U.S. markets close.

A simple regression, using monthly data, to see how uncertainty affects the Japanese economy and stock market shows that the economic and trade policy, global economy, and volatility (VIX) index coefficients are all negative. This negatively impacts the Japanese economy and makes it hard for investors to hold stocks and make long-term investments. This high-level uncertainty impacts stock markets globally.

Exchange Rate Appreciations and Rebalancing

To defuse protectionist pressure and reduce uncertainty, we need to develop strategies. Since 2010, more than 80% of China's trade surplus has been due to electronics trade and in all but one year, China had the largest merchandise trade surplus in the world. The electronics sector is driving a lot of these imbalances with China. Although a lot of electronic consumer goods come from China, an awful lot of the value added that is included in those Chinese goods comes from the rest of Asia, so it is an Asia-wide surplus and not a Chinese surplus with the rest of the world.

Rather than having large surpluses with Asia and strong protectionist pressure, if the Asian currencies appreciate together that would affect the electronics products' dollar value and naturally rebalance the products away from the U.S. and diffuse some of the protectionist pressure. Although appreciation would be difficult for Asia, it would be a lot better than facing uncertainties from tariffs and trade wars.

To explain China's exports of final consumer electronics products, how they are affected by exchange rates in upstream countries, how the renminbi exchange rate affects China's exports and how the state of the economy and gross domestic product (GDP) in the importing countries affect China's exports, a regression analysis found that overall exchange rates in upstream countries are very important, so a 10% appreciation in upstream countries would lead to about 15% decrease in China's electronics exports. The renminbi exchange rate actually does not matter as much.

President Trump's suggestion to China to reduce their surplus and let their currency appreciate might not be as effective as the case where upstream countries' currencies also appreciated.

China's smartphone and computer exports yielded different results. The weighted exchange rate in supply chain countries seems to matter and still the renminbi does not matter much for smartphone exports. However, in the case of computer exports, the renminbi matters more than upstream countries' exchange rates. This may be because computers are more commoditized than smartphones. With smartphones, the value-added is coming from parts and components from the rest of Asia, whereas with computers there is not much value added from the parts and components.

The price index of computer and telephone equipment indicates that computer prices have collapsed rapidly compared to phone prices. If true, this suggests that goods such as smartphones with advanced features enable producers to maintain some pricing power. Technologically-advanced features such as accelerometers or gyroscopes produced in upstream countries explained why exchange rates matter more for phone than for computer exports.

Using this work, I then looked at the area of exchange rate policy. Exchange rates throughout the supply chain seem to matter for electronics exports. For East Asia's surplus with the rest of the world, the exchange rates throughout the region seem to matter.

If exchange rates in East Asia could appreciate together against the US dollar, it would help rebalance trade and fight off protectionist pressures. It is hard for Asian currencies to appreciate individually as they compete with each other in third markets. If Korea decides to appreciate and Japan does not, then Korea loses competitiveness, so it is very hard for one country to make the decision to appreciate alone. If countries appreciate together, then they would not be in a competitive disadvantage relative to each other.

How Could Asian Currencies Appreciate Together?

How the Asian currencies might be able to appreciate together is a very difficult issue. Asian countries are pursuing many policies which indirectly make the exchange rate weaker. Although the Bank of Japan's policy of 2% inflation target is good, it makes the Yen weaker. It is unclear if the Japanese citizens will be better if inflation comes to 2% rather than 1% or if it will cause more spending or if it will be really beneficial. If the Bank of Japan did not focus on a 2% inflation target, that could make the Yen stronger.

Korean and Taiwanese government pension funds invest heavily abroad making their currencies weaker. China aggressively provides loans to other countries at high interest rates, but it is unclear if this is actually good for other countries. If China did not do this, then their exchange rate would be stronger. The policy needs to be rethought wherein rather than running large surpluses with the rest of the world, the capital should be invested domestically in China for fighting pollution, investing in rural education and their own people, and the same applies to many other nations in Asia. This will naturally make their exchange rates stronger and benefit their own people.

Currency appreciation will also increase Asian consumers' purchasing power and maintain stability of Asian currencies. Hayakawa's and Kimura's research shows that exchange rate stability is beneficial for trade in Asia, encouraging the flow of parts and components and foreign direct investment (FDI) and benefiting production networks.

If the US market is uncertain or closing, Japan and other Asian countries should pursue free trade agreements (FTAs) and try to open up other markets to increase the possibility of trade in other markets. So how can Japan cope with the competition and technological change that they are faced with?

Firstly, Japan should view rapid technological changes as an opportunity. Warren Buffet says that a lot of volatility leads to a lot of opportunity, so since things are changing very quickly, there should be a lot of opportunity. Secondly, investing in human capital is a good way to prepare. Japan was successful at facing challenges, assimilating technologies, and learning new ways of producing because it invested in human capital. Further investment in engineering and broadening their education may prove beneficial Finally, Japanese producers should focus on craftsmanship rather than getting into price competitiveness.

In conclusion, Steve Jobs said, "Technology alone is not enough. It is technology married with liberal arts, married with humanities, that yields the results that makes our heart sing."

Panel discussion

I will ask questions on presentations and then have your views on the current markets. Will financial liberalization and increases in money as foreign reserves increase lead to another financial bubble burst?

We are heading in that direction. The amount of money in circulation will only increase. If the US dollar is dominant, the world will need it more and the U.S. will have to sell its deficits/debts overseas. This is the reason why we need a multi-currency system in the world.

The U.S. is at the center of the money market. How is the current situation in the U.S. as compared to the Lehman shock period?

The U.S. has more stringent measures in place. The financial markets'/institutions' behavior has been under stricter supervision. With no financial stresses building up, the U.S. will not be the trigger point for the next crisis.

Usually, emerging countries hold onto foreign reserves as insurance in the time of financial crises as they have low foreign reserves. Surprisingly, many industrialized countries are weak during a crisis due to a low foreign reserve versus GDP rate. What is your perspective on this?

Some people argue that the International Monetary Fund (IMF) and other international organizations tend to be lenient toward developed countries and have different conditionalities between developed and developing countries. Unlike emerging market economies, industrialized countries other than Japan have low foreign reserves partly because they have easier access to other assets to tackle a financial crisis if it ever arises. Developing countries tend to be dependent only on the IMF or on their own foreign reserves.

What is the biggest factor causing stock market stagnancy?

Historically speaking, stocks are at a higher level relative to their earnings. Uncertain policies and trade wars make the stock market vulnerable and keep investors away. A fairly minor trigger could cause a large correction in stock prices. Sensible long-term policies of free trade and lower budget deficits in the U.S. would help defuse some of the risks being faced now.

To mitigate the China-US trade friction, would renminbi appreciation be a solution, and if so, to what level?

A 10% appreciation of all East Asian currencies together would be more effective than renminbi appreciation alone.

How much appreciation of the Japanese yen would be beneficial in reducing the US-China friction? How should we rebalance if a strong currency leads to economic deterioration?

It would be better if exchange rates adjusted in the firm-side environment where there is more certainty. Although currency appreciation gives more purchasing power to Asia, it could be offset by investing in human capital which in the long run would be more productive and the economy will be much better.

What would be the appropriate level for yen against dollar, if the current level of yen is weak?

As Japanese producers are able to adapt, they would find a way to deal with a stronger yen.

In the emerging markets, the stock prices are not strong, whereas in the U.S., it is better. But they are weakening in Japan. In Japan, it is lower than at the beginning of the year. How should we view this situation?

Currently, the price-earnings ratio is high which means the market still needs some adjustment. The tumultuous stock exchange is causing uncertainty. People are not investing in stocks and going for lower-risk products. In this situation the price of government bonds tends to rise and the yield tends to fall.

There is a lot of volatility in the market making the investors uneasy. There is a possibility for a major correction.

Do the current events reflect the beginning of 2016 when the stock prices dropped?

As the U.S. economy slows down, the Federal Reserve Board (FRB) may want to stop tightening its monetary policy. But at the same time, the FRB wants to raise the interest rate to a certain level that would allow it to have more room for future monetary expansion when a next recession comes. Currently, the FRB is facing a dilemma between tightening monetary policy in preparation for a coming recession and not tightening the policy to avoid a slowdown of the economy.

The investors are seeing a short-run stimulus in the U.S. economy. The long-run prognosis is a future U.S. economic slowdown, which may now be causing the oil and commodity prices to drop.

What policies should Japan take other than yen appreciation?

The current economic situation is similar to the 1980s, where the interest rate in the US was high and the dollar was strong. However, Japan's economic and industrial structure has changed since then. Because of the long period of yen appreciation, many industries have moved out of Japan overseas, creating the current supply chains. Secondly, although Japan still runs a current account surplus, its trade balance is very close to deficit and sometimes enters into deficit.

It is important to maintain economic sanity. The Trump administration's policies do not make economic sense. Even if there is trade tension with the U.S., Japan will be more resilient now than it was in the 80s as it has already moved much of its production overseas.

Do you think that in 2019, the global economy and financial/stock market will stabilize or will it continue its downward trend and what do you think about the US dollar and the Japanese yen currency rate?

Now many developing countries do not have the fixed exchange rate arrangements. Therefore, there would not be discrete crisis situations like the currency crises that we observed in the 1980s and 1990s. Instead, the economic situation might deteriorate rather slowly like what happened to Brazil. This kind of economic situation could lead to the rise of nationalist or populist political leaders, which can increase political risk.

Although China-US tension is a big risk and needs resolution, the leading economies should pursue sensible long-term economic policies that are good for the stock market and the global economy next year.


As the emerging markets are financed in US dollars, does currency and maturity mismatch still exist? What insurance, other than the foreign reserves, do the developed countries specifically have and if the developing countries were to stop accumulating foreign reserves, what would they need to own as insurance?

About the mismatch on maturities, developing countries are not borrowing over the longer term from foreign investors. They finance in the short term and invest in the long term. Other than cash, developing countries have foreign assets as insurance. Moving ahead, international organizations (such as IMF etc.) should create a multi-currency structure. Currently, if an emerging market crisis happens again, it would only strengthen the dollar's dominance in the international monetary system, which is not necessarily a stable system.

Is the U.S. taking any measures in trying to build up their competitiveness? Why is the multi-currency system moving so slowly, and what does the U.S. think about a multi-currency system, since they have a dominant currency right now?

To build up their competitiveness, the U.S. needs to reduce budget deficit, red tape and allow entrepreneurs to compete.

The multi-currency system is not happening for 2 reasons: China's monetary liberalization is not as smooth as expected when the IMF decided to include the renminbi in the basket for the SDR in 2015. When China experienced capital flight in 2016, China imposed capital controls on the renminbi, instead of further liberalizing. Also, some experts think that the international monetary policy based on one dominant currency (like the current one) is more efficient and effective because it does not involve exchange rate risk as could happen with a multi-currency system. In addition, the dollar-based system has been around for such a long time that there would be an inertia. In the short term, the U.S. does not seem to be interested in pursuing a multi-currency system. In general, the US seems to be quite inward-looking so that it may not be interested in changing the status quo.