Is it lucky that Japan's central bank is under the thumb of its politicians? Perhaps, since its once and future leader, Shinzo Abe, seems to be the only one with a plan to shock its economy back to life, à la Dr. Frankenstein. Markets welcomed his party's electoral victory earlier this month, but part of his platform was a tougher stance on China and territorial disputes in Japan's neighborhood. In terms of the health of the global economy, fueling conflict in East Asia could negate whatever gains Abe achieves at home. Here's hoping he leaves the nationalist rhetoric on the campaign trail and focuses on raising the living standards of his constituents.
China's new leaders have much more power than Japan's Abe to reshape their economy, but, unlike him, they haven't signaled any sudden changes. Nevertheless, they have big challenges ahead: curbing overinvestment, building demand for goods and services in the domestic market, turning the renminbi into a convertible currency, reducing civil unrest, and managing a pile of foreign reserves with highly uncertain exchange and interest rates. Many of these problems would go away, or at least be less pressing, if the new leaders could unleash a new source of economic growth. A thorough legal and regulatory reform that instituted more transparency, stronger property rights, and better protection of investors would do the trick.
THE MIDDLE EAST
What will happen in the Middle East, and how will it affect the global economy? I don't know, but I am pretty sure that something will happen in the Middle East and it will affect the global economy in 2013. Syria and Egypt still look volatile, and Israel, Lebanon, and Iran are always wild cards. The main interest of the major economic powers now is containment -- how to stop a conflagration from disrupting trade and growth. But there are upsides, too. As soon as Egypt can stabilize and restart its economy, it can become a regional powerhouse: a country of more than 80 million people growing by more than 6 percent per year. Egyptian stocks, which should be a leading indicator of economic growth, have already started to climb.
A return to faster growth will inevitably mean a return to higher prices for food, fuel, minerals, and metals. The global economy doesn't have to pick up much steam for prices to spike, since demand often increases more quickly than supply can respond. We've been seeing crop prices high enough to cause riots every couple of years now, and investors will likely seek out companies that can boost yields -- whether in harvests or extraction processes -- or come up with substitutes for resources in short supply, such as copper and rare earths. Those are long-term plays, though -- we can't count on innovation to solve shortages in the near term.
Every day, emerging economies are becoming more closely linked to the global financial system. These economies are some of the fastest growing in the world, but it's not always easy for foreigners to buy into them. Rising issuances of stocks and bonds are gradually opening up these markets, connecting money from around the world with profitable opportunities. Issuances of debt securities in developing countries have risen steadily for the past few years even as the global economy struggled to grow, and bond funds covering emerging markets have performed extremely well. This trend has plenty more room to run, and it's no accident: Giving the billions of workers in developing countries access to new capital -- in this case, by bringing in foreign money to buy it -- is one of the best ways to make them more productive, helping them to earn higher wages and increase their own spending. The more this happens in 2013, the better 2014, 2015, and every year thereafter will be.