Resembling Pre-Lehman Situation

The leaders of Group 7 shared common recognition that world economy is facing risk of slowdown in emerging economy in the meeting in Ise-Shima, Japan, on Thursday. So what? If they had not agreed on that notion, it must have been a meeting of the novices. Encouraged by that conceptual basis, Japanese Prime Minister Shinzo Abe analyzed that current situation of world economy was close to that in a period before Lehman Shock in 2008, paving the way to postponing consumption tax hike.

Simply believing in digitals, Abe laid some data that indicated similar trend of pre-Lehman era. He made a presentation that commodity price of energy, foods or raw materials declined by 55% between June 2014 and January 2016, which was as great as in between July 2008 and February 2009 around Lehman Shock. And about growth ratio of investment by emerging countries like China or developing countries, Abe insisted that it marked 2.5% in 2015, below the level of 3.8% in 2009. “We could not prevent the crisis in Toyako Summit just before Lehman Shock. I don’t want to make the same mistake,” stressed Abe.

Newspapers ran a big headline on front page Friday morning that Abe would postpone consumption tax hike planned in next April. He has been saying that he would raise consumption tax rate from 8% to 10%, as long as emergency such as Lehman Shock or great earthquake would not occur. He interprets his words as he can do that, if Lehman Shock class economic crisis happens. He wanted an endorsement from international leaders that this is a critical moment like pre-Lehman era.

Unfortunately, a leader with the longest experience in the summit dismissed the notion. “I wonder if we can call it crisis,” Japanese newspapers reported as Merkel’s words. For the senior leader who dealt with actual crisis management in Lehman Shock, current world economy was not enough to be named crisis. “The world economy is showing signs of stable growth, but there are risks,” Merkel said to the press without any agitation. She also insisted on the necessity of structural reform, which was the weakest point of Abenomics.

Market was also negative on the notion presented by Abe. Economists in Japan analyzed that the background of current world economy was different from the situation of Lehman Shock. While decline of commodity price was caused by significant down of demands in Lehman era, current price down is brought by excessive supplies, as seen in overproducing of shale oil. More economists expect higher growth in 2016 than in previous year. Market recognizes Abe’s reasoning as unreasonable.