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Economy

Two risk factors heighten uncertain global economic outlook

TOKYO -- Uncertainty over the outlook for the global economy is increasing, a sentiment evidenced by the fact that the International Monetary Fund recently cut its global growth forecast. The IMF decision has led to a rise in the volatility of global markets.

Koichiro Watanabe

     In a recent interview with The Nikkei, president of Dai-ichi Life Insurance Koichiro Watanabe spoke about current risks and his outlook for the U.S., Europe, emerging economies and Japan from the perspective of an institutional investor.

Q: What is your view on the global economic outlook?

A: There are two factors behind the growing uncertainty around the world economy. First, global markets have become integrated and volatility is prone to increases as a result. Take the volatility index or the so-called "investor fear gauge," for instance. Market players pay close attention to this index. Even though the global economy is not in as bad shape as the European debt crisis, the index shot up to the crisis level just because the IMF cut its forecast.

     Second, unexpected risks such as the Islamic State or the Ebola outbreak have surfaced. Risks that we can't calculate based on past experience are called "emerging risks," but they are often overestimated. If we can deal with risks appropriately, the global economy should be able to sustain a gradual recovery. Therefore, I talk about an optimistic outlook based on our will [to achieve recovery] and reasonable grounds.

Q: Are you saying that the global economy is not so bad?

A: When the outlook is murky, it is important to look at what is actually happening on the ground as well as economic indicators. When people look at the U.S. economy, they often think about stagnant industrial cities in the north of the U.S., such as Detroit. I went to the southern U.S. state of Alabama in June to visit a U.S. firm we acquired, and I came away with a completely different feeling about the U.S. economy. Local economies are clearly picking up in the South and the Midwestern parts of the U.S. due to the growth of the Mexican economy and the American energy revolution. I could see that the U.S. economy is recovering and it is strong enough to lead the global economy.

Q: On the other hand, uncertainties still remain over eurozone economies and emerging nations. How do you see them?

A: While it is true that eurozone economies have stalled, the weak euro will benefit them as they go forward. I don't think the debt crisis will repeat itself but rather the situation will start to improve. Yet, the Eurozone may be on the verge of deflation, so it will take a long time to recover. As for emerging economies, I think they will gradually return to the path of growth once the U.S. economy is fully back in shape.

Q: What is your assessment of Japan?

A: The Japanese economy, spurred by the expansionary economic policy package known as Abenomics, is now at a critical juncture. Consumer confidence has tanked due mostly to April's sales tax rise [from 5% to 8%] and poor weather conditions. The Bank of Japan had to take additional monetary easing measures.

     Having said that, I wonder if the situation is that serious. Businesses have maintained a high level of capital spending and corporate sentiment has remained high in fiscal 2014. Apparently, companies are facing a worker shortage and are increasingly coming under pressure to increase wages.

Q: Are there any changes in your company's asset management policy?

A: Prior to the introduction of Abenomics, our biggest task was to reduce the size of risk assets. Currently, however, we are diversifying our investment flexibility in various fields, including risk assets. This is characterized by our investment in growth sectors. We have appropriated 200 billion yen ($1.74 billion) for three years from 2013 to invest in the environment and infrastructure-related fields as well as emerging nations. We have spent more than half of this amount already.

     As a life insurer, we chiefly invest in Japanese government bonds. But given the prolonged low interest rates, we have no choice but to curb JGB investments.

     Given the current economic outlook and interest rates, I suppose we may need to take foreign exchange risks and increase investments in foreign bonds.

Interviewed by Nikkei senior staff writer Futoshi Oguri

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