(Bloomberg) -- Elevated interest rates may still cause a recession in the US and Europe and that’s a risk scenario for Asia this year, according to Asian Development Bank President Masatsugu Asakawa, who some economists see as a contender for Bank of Japan governor.
Unlike in Japan, labor markets in the US and Europe could keep tightening to fuel strong wage pressure that would limit central banks’ scope for cutting rates, resulting in a recession, Asakawa said in an interview Thursday.
“The main scenario is a soft landing,” said Asakawa. “But the risk of entering a recession isn’t zero.”
Separately, the ADB chief also flagged the organization’s latest efforts to help finance climate change-response measures.
Asakawa’s comments come with BOJ watchers scrutinizing the views of possible candidates to replace Haruhiko Kuroda as central bank governor.
Like Kuroda, Asakawa is a former finance ministry veteran who took the helm of the ADB after serving as Japan’s top currency official.
In the latest Bloomberg survey, two economists named him as the most likely person to replace Kuroda, while 20 said he’s a potential deputy governor. Asakawa declined to comment on the central bank or expectations that he might join the bank’s leadership.
The ADB head cited structural issues in China and the ongoing war in Ukraine as other key risks this year.
Asakawa pointed to the various structural problems brewing in China in the medium term. As Japan’s neighbor is trying to shift toward a consumption-based economy, it would have to invest heavily in social security if it intends to really drive domestic demand, Asakawa said.
China’s population decline has already begun, and the costs needed to get to net zero carbon emissions by 2060 are also likely to be a drag, the ADB chief said.
“I don’t think it’s likely to return to 7%, 9% growth,” Asakawa said.
In the short term, Asakawa also saw China’s emergence and recovery from its Covid Zero program as potentially a factor that could lift inflation again globally as demand for oil returns.
On Ukraine, the war’s contribution to energy prices and the subsequent monetary tightening around the world has already affected growth, Asakawa said.
While Asia was less impacted by the rise in wheat costs due to the relative stability of rice prices, limits on Russia’s fertilizer exports could hamper rice and other agricultural products in Asia down the road, Asakawa said.
“For now though, the direct impact of the war is relatively limited in Asia,” he said.
Green Finance
Asakawa said the ADB is highly focused on climate change issues this year, and he’ll seek to unveil details of a new climate financing facility at an annual meeting in May.
The new program will involve guaranteeing parts of loans in a way that can be leveraged to increase the overall lending size, he said.
The program might prompt other organizations such as the World Bank to follow with efforts to generate far more climate finance funding, he added.
“We’re still figuring out the details,” said Asakawa. “But we’d like to make this an innovative financing method for climate change.”
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