Thank you very much for welcoming me here today at this distinguished symposium, especially as being in the Nikkei Hall brings back happy memories of my time as a correspondent here in Tokyo. My engagement with Japan began 23 years and one month ago, when I came to occupy an office in the part of the Nikkei building known as "gaijin corner" as the correspondent for The Economist. So I am glad to be back here again, although now in Nikkei Hall, or "symposium corner". I am also very grateful that so many people took time out of their busy schedules to attend this meeting, and I very much look forward to the panel discussion and to your questions later on. As a journalist, I have always believed that I learn more when I am listening than when I am speaking, so I am particularly interested in hearing your point of view and learning what questions interest you.

My subject today is the world economy: how it may be changing, and how Japan´s revival may fit into that change, may be affected by it, and in turn may affect the world.

My task, therefore, is to talk about the future, with some guidance from trends in the recent past. This is an inherently dangerous thing to do, but of course also inherently tempting. Until the future comes, no one can tell you that you are wrong. And by the time it is clear that you were wrong, you hope that everyone will have forgotten what you said.

More seriously, it is a task that we should all attempt with a very large dose of humility. Our expectations are bound to be wrong, for economies are such large, complex creations of very large numbers of complex human interactions, with so many forces affecting everything. Sometimes, we try to hide from this complexity by saying that we are talking about "new paradigms" and "structural trends", rather than being distracted by short-term forces and cyclical movements. But this is something of a delusion. In practice, short-term and cyclical trends have a big impact on what we like to call structural, long-term trends, especially on our perceptions of what those structural trends consist of. They especially do so through a force of which economists are particularly leery or distrustful: politics. Cyclical movements can trigger off political forces and changes which then alter the long-term trends. An example would arise if the much-forecast American recession during the next year or two led to a big rise in protectionism in the United States, which might prompt retaliation elsewhere and some reversal of the trend of globalisation. Alternatively, political events can act as an independent, external trigger for economic change: wars and acts of terrorism are the most common example.

So, in looking for a "new paradigm" in the world economy, we must be cautious and humble. We must also, I would suggest, be aware of the times in the past when the conventional assumption about a "new paradigm" was proved quite quickly to be wrong.

For example, it was clear to all intelligent observers during the 1970s that energy prices were destined to stay high for the long-term, owing to resources shortages and the control of the oil producers´ cartel, OPEC. Yet in the early 1980s they commenced a decline that lasted almost two decades.

It was clear to everyone in the mid 1970s that America was in a serious economic and social decline, thanks to failure in Vietnam, high inflation and considerable social disorder. The same thing was clearly, in many people´s opinion, a structural trend in the mid-1980s, when slow growth, poor productivity performance and a strong US dollar met its apparent match in the unstoppable advance of Japanese manufacturing exports.

And I scarcely need to remind this audience of how wrong most people were about Japan in the second half of the 1980s, not just about its own economic prospects but also about the "new paradigm" that many thought Japan represented for the world economy.

So, we certainly need humility when we look for "new paradigms". But also, perhaps it is a good idea to rephrase our questions. Rather than asking ourselves: what do we predict might happen during the next 10-15 years?, we should ask ourselves "Which of our conventional assumptions might prove to be wrong, this time round, and what difference could it make?"

That is what I will try to do now. Let us first identify the main features of today´s world. The most striking features of today´s global economy, to my mind, are the following:

1. The strength of global economic growth in the past four years, with world GDP rising by 4-5% a year, despite two major wars involving the USA and a huge rise in energy prices.
2. The breadth of that global growth. In other words, behind that overall impressive number lies another story: it is that an extraordinarily large number of countries has been participating in the growth, especially among the so-called "emerging markets", ie what we used to call "developing countries". Growth is not being led any more by the 1980s "triad" of America, Western Europe and Japan; but also it is not simply a matter of rapid growth in China and India. They made up only one-quarter of the total increase in emerging countries´ GDP last year. If you look at the long list of emerging countries whose economic data are tracked on the back pages of The Economist each week, you will spot a remarkable fact: they are all enjoying positive growth. Yes, this is what we call "globalisation". But that standard word obscures more than it reveals. Previously, during the globalisation of the 1980s or, especially, the 1990s, there was always some country or region going through an economic crisis of some sort. And others were left out altogether, especially sub-Saharan Africa. Now everyone is taking part.
3. The reason for that is partly that more countries have chosen to open their economies to trade and investment. They have joined the world economy, in other words. But that is only part of the story. The other part is told by the striking rise recently in energy and other commodity prices. Oil prices at their peak of nearly $80 a barrel in June 2006 were nearly eight times higher than at their recent trough of $10 in 1998. Prices have fallen now to slightly less than $60, which is nearly a 25% drop. But that still means that since the invasion of Iraq in March 2003, oil prices have doubled. Other commodity prices, meanwhile, have increased by much more. Their climb began only in 2001 or so. Since then, overall industrial commodity prices have more than doubled, while metals prices have almost trebled. The price of some widely used metals, notably copper, have more or less quadrupled. This trend has shared the benefits of growth out to a much wider range of emerging countries, including the resource producers of Africa and, of course, the oil producers of the Gulf, Africa and Latin America.
4. Despite such rises in the prices of basic inputs, inflation has remained low. When I had to prepare a farewell article to mark my retirement from The Economist in March this year, I checked what had been the overall world inflation rate in 1993, the year in which I became the magazine´s chief editor. It was 35%. The rate for 2005 was 3.7%. This dramatic change took place despite much faster economic growth: growth in world real GDP in 1993 was a feeble 1.3%, compared with the rates of between 4% and 5% we have seen in the past four years. There are many reasons for this decline in inflation: the spread of independent central banks, better monetary policy all around the globe, more open economies, more competition, the emergence in the global labour supply of billions of extra workers in the emerging countries. Now, though, many people worry that inflation could rise again, under the pressure of resource shortages and rapid demand growth in China, India and other emerging countries.
5. Even though they are increasingly bracketed together as "Chindia", another remarkable aspect of today´s world economy is that the economic paths being followed by these two countries are so different. China has blended together the model of post-Meiji Japan—of openness to foreign knowhow and capital—with the export-led model of post-1945 Japan, plus a twist of its own: that it has become the completion line for a variety of parts and semi-finished manufactures produced in other East Asian countries. Trade (imports plus exports) equals an astonishing 70% of China´s GDP, but at least half of that total is really just China´s part of an integrated Asian production system. India meanwhile, despite being vastly poorer than China—its GDP per head remains at about $800 versus China´s at nearly $2,000—has so far failed to exploit labour-intensive manufacturing. Its growth since the early 1990s liberalisation, and especially during the past five years, has been led by high-tech services, including IT, software development and business-process outsourcing, along with high-tech manufacturing.
6. And my final observation about what is remarkable about today´s world economy concerns America. America has, ever since the early 1990s, had a remarkable success in confounding the pessimists, those who wrote its chances off in the 1970s and 1980s as being somehow doomed to decline. It also shrugged off the boom and bust in the high-tech NASDAQ stockmarket of 2001 with one of the shallowest recessions on record, even despite the terrorist atrocities of September 11^th in that same year. Rapid growth, strong productivity performance and low unemployment have been the main features of America—but along with the other main remarkable point, namely that it has been importing hundreds of billions of dollars every year in capital from the emerging countries of China and OPEC, along with Japan, to finance investment and hence its vast current-account deficit. Almost all economists have constantly decried this deficit, saying that it cannot be sustained, and cannot keep rising forever. And yet it has been, even as it rises towards 8% of GDP. The dollar has fallen in value, but few Americans have noticed. It certainly hasn´t collapsed, as many foreigners forecast.

So, those are what I see as the main elements today of what might be called the "new paradigm" of the world economy, or at least the most striking features of that economy: fast global growth, shrugging off political instability; broad growth; rising energy and commodity prices; low inflation; different models for China and India; gravity-defiance by America.

But is this really a new paradigm, or just a temporary combination of short-term trends? Or, rather, how much of it might be temporary, and how much could be longer-lasting? In other words, how might our common assumptions and observations about the world economy now be wrong? And how might all the answers to this affect Japan?

The honest beginning to the answer, of course, is that we don´t know. But we do have to guess, especially at distinguished symposiums but also in our everyday assumptions. Here, therefore, are my guesses.

I shall begin with what to me is the most suspicious part of this current pattern, or new paradigm, namely the boom in energy and commodity prices. There is a logical explanation for why this might be long-lasting, namely the growth in demand from China today and India tomorrow, as both countries build affluent, consumer-durables-buying middle classes and as both countries invest heavily in construction and in new factories. Such growth in demand will also be shared by other, smaller emerging countries such as Vietnam.

If it does continue, then these high prices will reward resources producers all around the world, and will put pressure on inflation and corporate profits in consuming countries, including Japan but also China and India themselves.

One thing that is suspicious to me about this phenomenon is the sheer speed of price rises: growth in demand has not appeared anything like as quickly as might justify doublings, treblings and more in prices in merely a year or two. But also there is something missing, to my mind, from this so-called "super-cycle" theory of natural resources. It is the supply side. The recent history both of energy and of industrial commodities has been one of declining investment in new supply for about 20 years in both cases. The question is, how quickly might new supply come on stream, now that prices have been high for four years or more, and now that floods of investment capital have arrived in the industry?

After such a long period of low investment, the answer is likely to be that it will take quite a time for supply to catch up with demand. It can take three or four years to establish new mines, for example. To establish new oil and gas supplies takes even longer, especially as access to reserves is very politically sensitive: we might expect it to take five years or more before there can be any substantial increase in energy supply. But in both cases it will happen. And meanwhile, demand growth may well pass through a cyclical downturn, especially for energy.

That could well occur because a sharp economic slowdown appears to be under way in the United States, which is the world´s biggest consumer of energy. That slowdown is being caused by a slump in house prices, which in turn are likely to depress consumer demand. If America slows substantially or even goes into recession, then all countries that benefit heavily from exporting to that market will also be affected, at least for a while. That includes Japan and China, two other big energy consumers.

So it looks quite likely that recent high levels of demand growth, both for energy and for other commodities, will drop off. Supply increases will take much longer to come through, especially in oil and gas. But that does not mean the price drops will necessarily be gentle: price rises, especially in commodities, have had all the characteristics of a bubble, with lots of purely financial investment and speculation. As the cascade of new commodity funds starts to find returns dropping, so the flow of money outwards could become a deluge. And the oil market is anyway not a anything near to a pure product of supply and demand. It has a suppliers´ cartel, namely OPEC. And that cartel could well be less successful at maintaining its unity during a drop in prices than it was while prices were rising.

As a result, my guess is that we could see quite a big drop in the prices of energy and of industrial commodities during the next few years. There could be big drops without the "super-cycle" theory really being disproved, for oil at $30-40 a barrel would still be far above its trend value, far above the $25 that OPEC ministers cited as their target price as recently as 2002; and even a two-thirds drop in many industrial commodity prices would still leave them above their long-term trends.

If this guess is proved correct, then several of my "remarkable" observations about the world economy will have proved short-lived. Growth would no longer be so broad, as resources producers would suffer from price collapses and might even face financial crises. That would include two of the countries in Goldman Sachs´s famous "BRICs" analysis: Brazil and Russia. Inflation, though, would stay low: there would not be the feared revival of worldwide inflation, resulting from resources shortages. Indeed, given the vast amount of investment going on in countries like India and China, I would suggest that over-capacity, and hence a tendency towards deflation, might be a likelier long-term trend. And of course one of my arguments for these trend-shifts was the slowdown in America, so I have also guessed that the remarkable success of the world´s largest economy might be coming to at least a temporary end.

What might this mean for my assumptions, or observations, about China and India? And, last but most important of all, what might this mean for Japan and its much-vaunted economic revival?

I think this would be good for both China and India: their costs would fall, they would have less danger of inflation, and in India´s case the growth of its current-account deficit and hence its financing worries would subside. Both would suffer from a drop in demand growth in America and elsewhere. But in neither case is the contribution of net exports to America an absolutely decisive contributor to overall growth. Both have very strong contributions from domestic fixed investment and from public consumption, along with more modest growth in private consumption. So growth would slow, but I cannot see any reason to expect it to collapse.

Many in Japan are fond of predicting a Chinese economic collapse. But I think this is quite an unsafe assumption. China´s ability to continue to combine its vast resources of labour and capital together surely give it great potential for further growth. But that does not mean it will keep growing at 9-11% each year without changing. And those changes could bring risks, especially political ones.

The main change in trend that China is likely to need to make, if its growth is to be sustained, is a change towards higher levels of domestic consumption. That especially means higher public spending, on health and education and welfare, for those public services are in a weak state and causing big concerns among Chinese people about inequality and about their futures. It also means higher private consumption, achieved by spreading income growth to a wider range of the population. This change will not be easy, however, for any large increase in public spending is likely to lead to even greater concerns about corruption and about the ability of central government to control the activities of local authorities. Meanwhile, the increasingly affluent citizens of the big coastal cities such as Shanghai and Beijing will be demanding better protection for their rights, which mainly means a properly functioning rule of law. They will increasingly be concerned about the arbitrary powers of officialdom, for those powers threaten their own rights. This does not lead directly to democracy, but democracy is one possible outcome of this trend.

So is political instability, even instability lasting for several years. If that occurs, many people will conclude that China´s growth has come to an end. I doubt that that will be the case. It is likelier to be a pause, even a lengthy pause of a few years, after which growth can resume.

In India, the challenge is also one of public opinion and public expectations, but it takes a different form. The problem with India´s current economic model is that it creates too few jobs. IT, outsourcing and associated call centres simply do not employ many people: perhaps 2m or so. High-tech manufacturing is also growing rapidly, whether in steel or pharmaceuticals or other capital- and technology-intensive businesses. But that does not employ many people either. India´s labour force is 600m people, and most of them live in rural areas, depending on agriculture for their livelihoods. If India is really to sustain growth rates of 8-10% a year for many years, and if Indian governments are to win general elections, then the incomes and jobs of those 600m people will have to start to improve rather more than has been the case so far. The best ways for that to happen will be through the full commercialisation of agriculture, perhaps with the help of biotechnology; the construction of proper infrastructure to enable agricultural goods to reach their potential markets; and through the liberalisation of low-cost, labour-intensive manufacturing, which requires both that infrastructure development and the reform of labour laws.

In other words, for China and India to sustain their current rates of growth far into the future, both will need to move to new paradigms, new models of economic and social development. Will they succeed in doing so? It would be foolish to bet against them, such is the ambition for growth in both countries. But in neither case will the process be easy or smooth. Turbulence surely lies ahead. We should all fasten our seat-belts.

So, if I am at all correct about what might happen during the next few years, the world environment for Japan would look something like this: bad news, from an American slowdown or recession, with associated dangers of protectionism, particularly now that the Democratic Party has gained control of Congress; but good news, from a fall in energy and other commodity prices that would help support Japanese corporate profits and restrain inflation; and some danger of turbulence, in the longer term over the next 5-10 years, in Asia as both China and India seek to change course.

Right now, one could understand if commentators in Japan were rather more preoccupied by the immediate, short-term question of whether economic growth has come to a halt. Tomorrow´s quarterly GDP figures will attract a lot of attention. Clearly, activity has slowed down quite a lot in the past few months. But my question is: is this really all that surprising? And how worrying should it really be?

Since I came to Japan to research my article in The Economist called "The Sun Also Rises", during the summer of 2005, and then updated it to produce my book in Japanese of the same name, it has seemed clear that the most important part of the Japanese economy to watch has been the labour market, and with it the course of incomes and of consumption.

A recovery that began with strong exports to China in 2002-04, and was reinforced by rising corporate investment, only began to look real and sustainable once the growth in full-time, regular employment came to outpace the growth of part-time, lower-paid employment. This began in May 2005 and has been maintained ever since. Such a tightening of the labour market offered the prospect that incomes might rise at last, after so many years of decline, and that household consumption would then also rise more rapidly. Such demand would counteract the negative effect of continued cuts in public spending, and would also make recovery less vulnerable to external shocks. Only once household incomes and demand began to rise would it be entirely clear that the period of deflation had come to an end.

This process has begun but it has been slow. Incomes have begun to rise as unemployment has also fallen. That process has been been distorted by a rise in the labour force itself, as people who had left the labour force have chosen to re-enter it, now that more jobs are available. But also, not surprisingly, given that households have been reducing their savings for several years, some of the income growth has been diverted into higher savings. But many of the underlying indicators have remained positive: bank lending, investment, employment, incomes. The process is slow and gentle, but it remains positive.

Even if growth were to cease for a few months more, I would not be terribly worried. At this stage, there is not going to be a consequential banking crisis as there was in the late 1990s, given the reduction in non-performing loans. The Japanese economy is no longer an economy burdened by dangerous financial burdens and vulnerable to collapse. It is now a more normal economy, albeit a weak one, facing normal problems just like other economies.

Many observers still disagree with this rather positive evaluation. Japan does not just face normal problems, they say. It faces the abnormal problem of an ageing population, which is also bringing a slow shrinkage in the labour force.

This is of course true. The question is whether it is really a particularly big problem. The answer is that it a labour shortage could be a good thing if it leads to a rise in wages, and hence consumption, but that that risks inflation, uncompetitive companies and falling profits and investment unless productivity also grows more rapidly than it has during the past decade. A productivity growth rate of 1.7% per year would not be enough to counter the cost pressures that arise from rising wages and a labour shortage.

So, to my way of thinking, the main question for Japan is whether Japanese companies will now manage to achieve an acceleration of productivity growth, or whether the trend of the past decade will continue.

Lower energy and commodity prices will help ease the pressure on corporate profits for a time. An American recession would hurt those companies dependent on exports. But continued growth in China would, if it is sustained, help to balance that effect for the economy as a whole. Japan is fortunate indeed to be located right next to a rapidly growing, an investing, economy such as China´s, with such a big need for capital equipment. So there is likely to be quite a sustained support for Japanese exports and, through Chinese competition as well, sustained pressure for technological innovation.

How well Japan´s economy performs in these circumstances is not simply a matter of fate, of structural inevitability, of demographic destiny. It is a matter of choice: of what sort of economic choices the Japanese people wish the government to make on their behalf.

Most important, do they want more competition to be introduced into the still quite protected sectors of the economy? Do they want anti-monopoly laws to be enforced vigorously by a strong and well-resourced Fair Trade Commission? In the longer term, if they do, then the rate of innovation, of new business creation and of productivity growth would be likely to increase. Do they want the best and strongest companies to be able to buy weaker ones and to grow, including foreign companies? Or would they prefer management to be protected through poison pills and restrictive share provisions, and through Japanese institutional shareholders who have a cultural aversion to takeovers? If the first, growth and competition can be more vigorous; if the second, it will be weaker. Do Japanese people want universities to be among the best in the world, attracting the best staff and students from all around the world, and producing both knowledge and intellectual property that can be commercialised? Or would they prefer them to stay rather isolated, uninternationalised places, teaching and researching in a slow, socialistic sort of way? The first steps have been taken towards allowing universities to act freely, to be independent of state control, but there is still far to go.

It is a matter of choice. There is a great deal of understandable resistance to competition and to a greater freedom for markets. Rightly, reforms have been gradual. But they have been made. I suspect they will continue to be made, step by step, and the competitiveness of the Japanese economy will continue to increase. If so, then the future will be bright, with a high level of R&D spending producing plenty of new technology and a high level of competition ensuring that it is developed and used in a very vigorous way, enabling productivity also to grow rapidly.

But Japan´s future is not fixed or forecastable. It is a matter of choice.

Thank you for listening. I look forward to the panel discussion.