Transcript of a Press Conference by Rodrigo de Rato, Managing Director, IMF

June 22, 2004

Managing Director, International Monetary Fund
Japan National Press Club, Tokyo
June 22, 2004

Mr. Kenji Hanyu: Welcome, ladies and gentlemen. We have the new managing director of IMF. Let me introduce myself. I am from Tokyo Broadcasting System (TBS). My name is Kenji Hanyu. I shall serve as the moderator. Right beside myself from IMF, we have Mr. Dawson for public relations, and this is our new managing director, Mr. Rato. Beside him, from the Asia Pacific Department, Mr. Burton. Beside him Mr. Hino, head of the Asia Pacific Office. So first of all I would like to hand over the microphone to Mr. Rato for a very brief opening statement and then take questions from the floor.

But by custom I would like to introduce Mr. Rato very briefly. We say Mr. Rato but in English very often he is called Mr. de Rato. He was born in 1949, 55 years old—very young—born in Madrid. He has spent some time at the University of California at Berkeley, where he gained his Master of Business Administration. Within his own country, he was a member of the National Party, he was the Minister of Economy for the government of Spain in the former administration led by Mr. Aznar, which unfortunately lost in the latest election. But during that administration, he was the Minister of Economy. On 7 June, he was appointed the Managing Director of IMF. Mr. Rato, the floor is yours.

Mr. Rodrigo de Rato, IMF Managing Director: Thank you very much, Mr. Hanyu. First of all I want to thank the Japan National Press Club for its hospitality, and I would also like to stress that I am very happy to be back in Tokyo, this time in my new responsibilities as the managing director of the International Monetary Fund. As you know, this is my first trip to the region as Managing Director, in this case to Asia, starting with Japan. I want to stress that my purpose in this trip is to listen to the leaders of Asia, and to work closely with them in the responsibilities of the Fund with this region and also with the world economy.

This is an important moment in the economic situation of Asia and of Japan. We are witnessing the end of a long economic crisis in this country, and as I had the chance this morning of talking with the Prime Minister, certainly the policy reforms has been very good for the Japanese economy and for the Asian economy as well, and for the world economy. Japan is leaving behind many years of very slow and even negative growth, and we are convinced that in the continuation of the reform agenda of the Prime Minister, and with the current stance of the Bank of Japan, that things could be even brighter in the near future. I will continue this trip tomorrow to China, then to Singapore and then to Vietnam. I am sure that in my talks and conversations with different governments and leaders, I will get a much clearer view of what are the needs and the positions, not only regarding the Fund, but regarding the world economy of the Asian countries.

Today I had the chance of meeting with Prime Minister Koizumi, and also with Finance Minister Tanigaki, with whom I will have dinner too. I had a meeting with the Deputy Governor of the Bank of Japan Mr. Muto, and I will have the chance of speaking with the president of the International Cooperation Bank in the next few hours. So this is quite an important day and I am very happy to be back here in Tokyo.

Mr. Hanyu: Thank you very much, Mr. de Rato. The copies of his opening statement will be distributed to you after the press conference. We only have the English version with us but by tomorrow on the home page website of the IMF, the Japanese language version will also be distributed. So we would like to now open the floor for questions. Those of you with questions please raise your hand, and I will designate you and please state your name, affiliation, and address your question.

Question: Toshio Aritake from the Bureau of National Affairs in Washington. By now I am sure, after your meetings with the Japanese government officials and the central bank officials, you must have more than learned about the Japanese economy. My question is, Japanese consumer spending now is close to red hot condition. Market interest rates started rising correspondingly, close to 2 percent from previously close to zero. My question is, should the central bank, the Bank of Japan, end its zero interest rate policy and return to a normal credit posture? If so, if that credit posture is necessary, how soon should the central bank act? Thank you very much.

Mr. de Rato: We share the view of the Japanese central bank, that its main objective right now should be to completely root out the deflationary pressures. It is true that the deflationary pressures have diminished in the Japanese economy, but not totally disappeared. So in that respect, we share the analysis of the monetary authorities of Japan. Once those deflationary pressures have totally disappeared, of course it will be the time for the monetary authorities of Japan to put forward a new strategy. But that is not yet the case, although I think that it is at close hand that that happens and we certainly think that the monetary policy followed by the Bank of Japan in recent times has been the appropriate one.

Mr. Hanyu: Yes, please?

Question: Anthony Rowley, Singapore Business Times. Mr. de Rato, as you are aware East Asia is moving slowly but surely towards closer monetary cooperation, both through the Chiang Mai arrangement of currency swaps and examining various exchange rate arrangements. How do you view the prospect of closer monetary cooperation in East Asia, including the possibility of a regional monetary fund at some stage? Your predecessor Mr. Köhler, indicated that he was not opposed to the idea of an Asian monetary fund. In fact if I could ask you very briefly in addition, in the global system where do you see the balance of risk lying at the moment? Is it in deflationary pressures or inflationary pressures?

Mr. de Rato: We see that regional cooperation not only in Asia, but in other parts of the world is a very useful tool for countries to have a brother-base that also helps them also to cope with the challenges of globalization. I come from an area of the world, Europe, in which certainly regional cooperation in not only financial but in all economic terms, has been very successful in that regard. So we are not only looking with interest but also taking an active role as much as we can in all the regional efforts. Regarding essentially the ones in Asia, we believe that the two you have mentioned, the arrangement for bilateral swaps, even if that moves toward multilateral agreements, and also the bond markets of Asia, are very positive steps and we are certainly very supportive of these efforts.

As regarding regional institutions, of course we are of the same opinion. Certainly we believe that the world has needed an international institution to follow up and take the steps to guarantee financial stability, like the International Monetary Fund. And that need is even greater right now in the global economy. So in that respect, we are convinced of the role of the Fund. It is now as important or more than it was in the past, given the important forces that the global economy is producing, especially in the financial sector. And we think that we can provide and we are providing already, a type of surveillance and expertise that is very important and very needed for countries. So we do not see that there is really a contradiction between regional arrangements like the ones you mentioned regarding swaps, or regarding bond markets, and the global role of the institution I represent.

Right now I think that overall in the world economy we are seeing a change of emphasis in monetary policy and already the markets are reflecting that. Certainly the new energy prices are increasing some prices, tensions, in most of our countries. But what we believe will be more important is what we can call the second round effect of the oil prices. We think that not only monetary authorities, but governments have to be vigilant regarding this second round effect that could be damaging for the world economy and for national economies. Up to the moment, we do not see clear signs in the increase of inflationary pressures in the main economies, but nevertheless we follow that with a lot of attention. And we believe that the evolution of monetary policy should follow that also with a lot of attention, especially as I mentioned, in the second round effects of increasing oil prices.

Nevertheless, even the effect that an increase of around US$5, permanent increase of over $5, in the world economy in the growth of the world economy, will have—the signs we see right now are in the upswing from the point of view of the growth in the world economy. So we believe that the year 2004 will finish with growth as a whole in the world in the realm of 4.6 percent, or maybe higher.

Mr. Hanyu: Questions, please.

Question: My name is Lindsay Whipp from Bloomberg News. I just wanted to follow up on the deflation questions. You mentioned earlier that you see Japan coming out of deflation in the not-too-distant future. Could you be a bit more specific on when you think that might happen? And my second question is regarding China. There has obviously been a lot of talk about overheating in the Chinese economy. What is your view on this and how do you think the authorities have been dealing with this pressure? Thank you.

Mr. Rato: Well I am not going to give you any specific date about that. I think that the position of the Fund is clear that deflationary pressures in the Japanese economy are much smaller than they were. We more or less share the figures that the Bank of Japan is using. But still, there is a risk of deflation and that should be rooted out by monetary policy in Japan, and we think that we are at arms' length of seeing the end of the inflation in Japan, but not yet.

As regarding the Chinese economy, we stated a few months ago, and we have continued to have the same analysis that there is certainly an overheating in investment and consumption. We share that view with the Chinese authorities. Tomorrow I am going to be in Beijing, so you will allow me to first talk with the Chinese authorities and listen to them. But the position of the Fund has been that the Chinese authorities should put forward monetary policy and also sectoral policy, to slow down areas of the Chinese economy so as to guarantee that the growth of the Chinese economy is sustainable in the longer period of time. But I would very much like tomorrow to be able to talk to the Chinese authorities before I give more answers to this question.

Mr. Hanyu: Next question, please.

Question: My name is Imamatsu from Mainichi Shimbun Newspaper. This is about the United States. I have a question about the US trade balance, they are suffering from a US$500 billion deficit per year. But for the time being, do you think this is sustainable. There are many debates and discussions ongoing, so what is your perspective about this trade balance of the USA? At this moment a major drop of dollar is not expected but if the more than 5 percent current account deficit GDP continues, do you think this is sustainable? In comparison to the other currencies of the world, Mr. de Rato, what do you think about the dollar's strength?

Mr. de Rato: Well, the position of the Fund in regarding the balances of the United States, it is clear that the need is for the US authorities to increase its internal savings essentially through a reduction of the public deficit. So in that respect we have stressed in our recent public position on the US economy that the reduction of the public deficit and the increase of the public sector savings in the United States is certainly needed to give a sustainable path to the US economy. I have to say that the same opinion has been given by the monetary authorities of the United States, and also the Department of Treasury has already put forward its plan to reduce the public deficit of the US budget.

So we think that is certainly one of the priorities and we believe also that in most countries, certainly in most of the developed countries, this clear moment of upswing of their respective economies is a very good moment to put forward reforms that could enhance the possibility of sustained growth in the future. And one of them is certainly the reduction of public debt, so as to make the situation in most countries more sustainable. Public debt in countries with aging populations, or in countries that need the attraction of foreign capital, it is certainly an issue that should be looked at with a lot of attention by all the authorities.

Mr. Hanyu: Next question, please.

Question: Until quite recently the IMF was expressing concern about the possible danger of disorderly correction in the value of the US dollar. Do you think that danger still exists? Do you feel any concern about the very high level of foreign exchange holdings, particularly US dollar holdings in this part of the world?

Mr. de Rato: Our position is that right now, the situation of the currency is much more calm than a few months before, and that certainly the way that central banks have been handling monetary policy is adequate. So in that respect we see a much more calm situation regarding currencies. Of course, global markets have a higher degree of volatility than we were used to only a few years ago, so in that respect we cannot rule out volatile movements. But what it looks in the medium term is that we are in a more stable situation.

That said, the future is not written, and will depend very much on the actions that the governments take. If in this situation right now with the clear recuperation of most economies, governments take the chance to reduce the imbalances—in most cases budgetary imbalances—I think that we will be having a much more broader base and a strong base for the future. In the case that that will not be so, then those imbalances will come back to us in a higher degree of volatility and also in a higher degree of abrupt changes in areas of the world economy, not only currencies but others. So that is why we are urging right now, at this moment, world leaders and national governments to accelerate their policies of reducing their imbalances and essentially in many countries, the imbalances produced by the recent crises, that is the budget imbalances.

The reserve holdings in Asia are part of the strategy of the Asian central banks. As for the moment, we do not see a risk in that situation.

Mr. Hanyu: Yes, please.

Question: Nakagawa from Nihon Keizai Shimbun. I have a question about Iraq. In Iraq, if you look at the security and other related situations, what is your perspective as IMF? How do you intend to support Iraq? We are talking about public debt. Now in Europe and the USA, there seems to be a difference in opinion about the reduction ratio of debt. What do you think we can do to overcome this situation?

Mr. de Rato: The position of the International Monetary Fund regarding Iraq is that we will start normal relations with the government once there is an internationally recognized government in Iraq. We hope that will happen in a few days, by the end of this month. So at the moment there is an internationally recognized Iraqi government, the Fund will start normally dealing with that government, and we are certainly aware and capable of responding to some of the needs that that government will have through some of our facilities. Probably the most immediate will be our facilities regarding post-conflict countries. So in that respect, we hope that we will be able to start talking to the new Iraq government around this summer.

Regarding the debt, that is a question that should be answered by its creditors. The Paris Club has asked us to make some technical analyses and hypotheses regarding the Iraqi debt. We have done it and we have given it to the Paris Club, but it is up to the Paris Club members to make the decisions regarding the Iraqi debt.

Question: My name is Takita, also from Nikkei. You mentioned that concerning the US economy and the US dollar that the reduction of public debt is a very important agenda for the United States. In actuality, when we observe the situation in the market, the US Department of Treasury for the first quarter of the calendar year, for the inward and outward investment statistics, it seems that capital inflow into the United States is being put up by public authorities, meaning that private investors are not ready in purchasing treasuries. They seem to be rather reluctant to do so. Under the current situation, does the market place credibility with the commitment to try to reduce the public debt in the United States announced by the US government? In other words, unless the long-term interest rate of the United States is set at a very high level, the refinancing of treasuries of the US government will become difficult. What is your opinion about this?

Mr. de Rato: First of all, it looks like we are in a change of monetary policy, and that of course will influence the position of the markets. But at the same time I stress what I have been saying in other questions, that a clear strategy, a clear budgetary strategy by the US authorities, we think will have a very good impact. That is from the point of view not only of the sustainability of the US growth, but also the balances of the US economy and its relationship with the rest of the world in the areas that you have just mentioned. That is why we think it is an urgent task to be addressed, like some other imbalances in other countries, or some other structural reforms. I do not want to leave you with the impression that our analysis is only a question of the US budgetary policy. For the US, we stress that need but for other areas of the world, we assert other needs, like structural reforms that will guarantee stronger growth in some other industrialized areas, like Europe.

Mr. Hanyu: If there are other questions, please. Yes please.

Question: AFP, I have a couple of follow up questions. You mentioned in general terms, many governments should reduce imbalances, but for Japan, is it not the need to get out of this deflationary cycle right now, instead of reducing the imbalances? Also, when you said that it was appropriate for governments to handle the currency markets earlier, would it be also appropriate for the Japanese government to intervene again if the yen appreciated very sharply, which could threaten the sustainability of the Japanese economic recovery?

Mr. de Rato: First of all I want to once again stress the position of the Fund regarding monetary policy in Japan. It should still be aimed at totally rooting out deflationary pressures. But the fact is that the Japanese economy is growing at a very healthy pace. We have seen very strong growth in the first quarter of this year, and our estimate is that year over year, the Japanese economy in the natural year 2004 will be growing above 4 percent. So we are already an economy that is certainly producing important levels of growth. And we think that budgetary policy in Japan should start aiming at reducing its deficits and having a clear medium-term strategy to reducing the level of debt, because we share the view with the Japanese authorities that the recuperation of the Japanese economy has been and should be based especially on the recuperation of private investment and consumption. So in that respect we think that it is not contradictory that we believe that monetary policy in Japan should continue being oriented towards routing out completely deflationary pressures and at the same time, that budgetary policy should start taking measures to reduce the level of debt.

As for currency markets, I have already said that we are seeing right now a much more stable situation in currency markets. Of course, currency reflects the fundamentals of economies, and in that respect we believe that if governments, especially of the big economic areas of the world, do take the chance they have right now of reducing their imbalances in a moment of upswing, we will see a much more stable situation in currency markets in the future. If that is not the case, then we certainly will see increasing volatility.

Mr. Hanyu: Yes, please.

Question: Levi Tillemann with Kyodo News. I was wondering if you would mind commenting on this monetary and political prospects of EU in light of the seeming inability of EU members to uphold the Maastricht convergence criteria?

Mr. de Rato: I think that the Fund has very recently published a very good analysis of the euro area economy as a whole and the need of structural reform. In my last eight years I was a European Finance Minister, so I have lived in the first row of the evolution of the Stability and Growth Pact. I have to say that in my opinion it has been very useful for the European economy and that without that pact, probably we would have seen a much worse deterioration of budgetary balances in Europe, given the fact that the European economy has had almost a stop in the last two years.

That said—I believe that before I became a member of the Managing Director of International Monetary Fund and I continue to believe the same—what is the priority of the European Union as a whole and the euro area in particular, are structural reforms that give those economies a much more dynamic capacity of growing. I think that the example of Japan is good in the sense that reforms have paid off and have provided a much more stable ground for the future of the Japanese economy.

Question: German newspaper Frankfurter Allgemeine Zeitung. The basic contradiction to what you have said about the fiscal policy in Europe and in Japan, Japan has a very high deficit and Europe cannot go forward because of the stability and growth peg. So what is the lesson Europe could learn from the economic environment we have seen in Japan in the 1990s?

Mr. de Rato: First of all, in the comparison between Europe and Japan you have forgotten a key issue, which is deflation. I think if you forget that, you might not be seeing the whole picture. Secondly, there is no proof—to the contrary, there is a clear proof that budgetary deficits have increased in Europe, so the fact is that most big economies in Europe are running deficits right now, some of them above the targets of the stability and growth pact.

My point is that without the Stability and Growth Pact, those deficits would have been much bigger, and even running deficits and increasing deficits in the European Union as a whole and the euro area as a whole, the growth has not been that important. In my opinion, and I insist once again that the last analysis of the Fund without any euro area economy as a whole is very clear. Structural reforms in Europe are right now the key issue.

With the economies growing much below potential, it is very difficult to avoid budgetary problems. So I think we need to see a policy of growth. I do not think that the policy of growth will come from a much higher degree of public expenditure, but to the contrary I think that it will come from supply side reforms.

Mr. Hanyu: Yes, please.

Question: Twenty-something years ago, I spoke with M. de Larosiere when he managing director of the IMF about 20 years ago. Since then there has been no Japanese managing director. Why is it the case that there has been no Japanese managing director in the IMF? Is the reason that there are no appropriate human resources in Japan? I would like to invite your opinion about this.

Mr. de Rato: Well, you will probably find a much better opinion than mine on that respect. Right now we have a deputy managing director from Japan, so in that respect I do not think it is a question of the Board not recognizing the importance of the Japanese candidates, but agreements between the Board of course, produce the results and I have the honor of having been chosen by the Board as the next managing director, and I have also the chance to have a deputy managing director that is Japanese.

Question: Hideaki Matsuda from Jiji Press. The Bank of Japan has to keep its monetary easing policy as you said, to root out the deflationary pressure totally. I think that the monetary authorities also have to devise its policies in forward-looking ways, and BOJ is now considering so-called exit policies from constructive easing policy, including setting some inflation reference range or something like that. Do you have any good advice for BOJ to take once the deflationary pressure is eliminated? Thank you.

Mr. de Rato: Right now what we are looking more closely regarding Japan's monetary policy is the policy in the short term, that is, what should be that monetary policy given the situation of the Japanese economy right now. The situation is that we are seeing a strong economy but we are still seeing signs of deflationary pressures. Once those deflationary signs have completely disappeared, of course it will be time for monetary authorities to establish a new strategy, and we certainly will be more than willing to collaborate with them at that moment. But I think that right now, the question is to completely leave behind all the deflationary pressures that have been so negative for Japanese society in the past years.

Question: Osumi from Nihon Keizai Shimbun. This is about the 30 to 50 years forward. Asian currency integration: do you think it would be coming in the near future? Not only Japan but China is growing. Then in the coming future what do you think would be the role of China if we move towards a currency or monetary integration of Asia?

Mr. de Rato: As I have said before, the Fund looks with a lot of interest and sympathy at regional movements of different degrees of integration. Certainly financial integration can be very useful, and is very useful whenever it happens, and we are looking with a lot of interest and giving our support to the financial integration movements in Asia. Monetary integration needs a degree of political commitment: that is of course a question that countries have to address. For the time being, monetary integration, the most advanced one is the one that happened in Europe. My last visit to Japan was as the finance minister of the European Union during the Spanish presidency of the European Union, in which the euro became a reality. So it is a fact that monetary unions are possible and are successful. Those two words that maybe now we all believe are very normal, were not very credible only three or four years down the road. So we are seeing new things in the world economy.

But of course, monetary union, as I have said, has some requisites from the point of view first of all of economic and market integration, and then of course also from the political points of view because currencies are not only economic instruments but are political instruments. There is probably not a more visible sign of nationality than currencies, and we know there are some European countries that have hard political problems to face with the disappearance of their own currency, so it is not an easy question. Right now we are seeing in Asia a strengthening movement of financial integration. Let us follow that and see where it leads us.

Mr. Hanyu: We are running out of time, so this will be the final question.

Question: Just one last question for you. There have been many critics of Prime Minister Koizumi's government saying that the reforms are not really necessary reforms, and that it is mainly the work of the corporates in restructuring. You mentioned your praise for Koizumi's reforms. What do you make of this criticism and could you give me a couple of examples of the reforms that you particularly admire that he has put through. Thank you.

Mr. de Rato: In any democratic society there is criticism and debate. It is not our job to qualify that debate, but certainly the reforms that have been put forward in opening the Japanese economy and giving more flexibility to its commercial markets and to the trade markets, I think they are important. Certainly we see that the efforts made with the recent law of pensions is also an important step.

Mr. Hanyu: Thank you very much. We would like to close today's press meeting. From the National Press Club, this is our custom to offer our gift, which is a ballpoint pen.

Mr. de Rato: Thank you very much. It is very nice, thank you.


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