Arun Motianey, director of fixed income strategy at Roubini Global Economics, says the global economy is at risk of collapsing inward unless policy makers address the threat of inflation and exchange rate inflexibility.
"The global rebalancing mechanism through flexible exchange rates is not working as well as it should," Motianey told CNBC. “The world economy needs to rebalance.”
"Many emerging markets are resisting changes in nominal exchange rates. Higher inflation is causing some correction in real terms but it is too little and may turn out to be too late."
Motianey warns that financial markets have become intolerant of governments acting as a source of final demand in the developed world. "We are seeing this most dramatically in the European sovereign debt crisis that is now mutating into a European bank crisis," he notes.
"If we slide into deflation — the likely fate of the developed market — a Japan-style outcome will become inevitable,” Motianey says. “Central banks may now need to talk about the necessity of inflation ... before it is too late."
The Wall Street Journal reports that the Bank of Japan has upgraded its growth projections for this fiscal year from 1.8 percent to 2.6 percent because of expected continued economic recovery stemming from healthy and increased domestic demand.
"Japan's economy shows further signs of a moderate recovery, induced by improvement in overseas economic conditions," the central bank said in a statement.
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