Diplomatic Bluebook 2001
Chapter II. JAPAN'S FOREIGN POLICY IN MAJOR DIPLOMATIC FIELDS

SECTION 2. ECONOMICS

E. The World Economy

Overall, the world economy maintained favorable conditions during 2000, continuing from the previous year. Nevertheless, signs of an economic slowdown did emerge in the second half of the year. While the volume of global trade continued to steadily expand, the capital flow into the emerging market economies has remained stagnant ever since the Asian monetary and financial crisis of 1997-98. Actually, the net inflow of private capital into these nations and regions fell to about 60 percent of the pre-crisis levels in 1998 and 1999, and declined still further during 2000.

The U.S. economic expansion that began in March 1991 continued into 2000, but there were increasingly clear signs of a slowdown during the second half. While there were concerns regarding a sudden plunge in stock prices, the correction in stock prices over the course of the year actually occurred in more gradual phases. From December 2000 through January 2001, the pace of slowdown of the U.S. economy accelerated, and in response the Federal Reserve Board (FRB) reduced interest rates between scheduled meetings of the Federal Open Market Committee (for the first time in two years since the 1998 Russian crisis).

Reflecting the continued economic expansion during the first half, the U.S. current account deficit increased. In fact, the current account deficit during the first half of 2000 (US$207.6 billion) was comparable to that for all of 1998 (US$217.1 billion). (The U.S. current account deficit for all of 1999 was US$331.5 billion.)

The economies of the Euro Zone and the United Kingdom also continued to expand overall during 2000, although signs of a slowdown in certain sectors did appear during the second half of the year. The value of the euro has been on a declining trend ever since it was introduced in January 1999, and from the summer of 2000 the G7 members and the European Central Bank (ECB) conducted coordinated intervention on the foreign exchange market. Subsequently, the differential between the economic growth rates of the United States and the Euro Zone narrowed, and at the end of October the value of the euro apparently bottomed out and turned toward a recovery.

The East Asian economies, which had been recording a rapid recovery throughout 1999 from the aftereffects of the Asian monetary and financial crisis, continued to expand during 2000, but the pace of this recovery eased slightly. The values of the Indonesian rupiah, the Philippine peso, and the Thai baht all fell against the U.S. dollar, and stock prices in all the major countries and regions aside from China declined across the board. Perceptions of an economic slowdown in the Republic of Korea (ROK) also grew stronger during the latter part of the year.

The price of crude oil, which had been falling due to the weak demand following the Asian monetary and financial crisis and the increase of production by Organization of the Petroleum Exporting Countries (OPEC) members, suddenly rose during 1999, and during 2000 crude oil prices posted their highest levels since the Gulf crisis. Especially after mid-August, when crude oil prices shot up even higher, there were growing concerns regarding the harmful influence on global economic growth. The Statement of G7 Finance Ministers and Central Bank Governors released at their September Prague meeting expressed concerns "about the adverse effects on the world economy of the recent sharp increase in the world oil price," referring to the issue of oil prices for the first time since the Gulf crisis. From around late November, however, crude oil prices started to trend downward, in part due to increased production by the oil-producing countries.

In the field of international monetary policy, both the International Monetary Fund (IMF) and other international institutions and individual countries exerted further efforts toward strengthening the international financial system to prevent any recurrence of the 1997-98 Asian monetary and financial crisis. At the July G8 Kyushu-Okinawa Summit, Japan made positive contributions as Chair, and the discussions toward strengthening the international financial system, including reforming the IMF, made substantial progress. While there were times when signs of possible emergence of financial crisis were detected in Argentina and Turkey during the second half of the year, with the prompt response by the IMF and other international financial institutions a worsening of the conditions was averted, and there were no major repercussions in other countries or regions. Henceforth, Japan, other developed countries, and international organizations need to deal with this issue from a wide viewpoint while giving sufficient consideration not only to the field of finance, but also to its interrelationships and policy coherence with other areas such as trade, investment, and development. Strengthening Japan's technical cooperation to the emerging market economies and other developing countries in diverse fields will also be an important issue.