Transcript of a Press Briefing by International Monetary Fund Managing Director Christine Lagarde

July 6, 2012

Tokyo, Japan
Friday, July 6, 2012
Webcast of the press conference Webcast

MR. RICE: Good afternoon everyone and welcome to this press conference on behalf of the International Monetary Fund (IMF). It is my great pleasure to introduce to you the Managing Director of the IMF, Madame Christine Lagarde. We also have on the platform today our Director for the Asia and Pacific Department, Mr. Anoop Singh, and the Director for our Regional Office for Asia and the Pacific here in Tokyo, Mr. Shogo Ishii.

I would like to ask you all to keep your questions fairly short and to the point. We will take two or three questions at a time, which will enable as many questions as possible to be taken. With that, I would like to ask Madame Lagarde to make some introductory remarks.

MS. LAGARDE: Thank you very much. Good afternoon. I thought maybe I would tell you a little bit at the beginning about my visit to Japan, and leave it to you to ask questions that you are interested in rather than waste too much time introducing matters you are not interested in.

So I had the great pleasure this morning of having had meetings with Prime Minister Yoshihiko Noda, Minister of Finance Jun Azumi, and Governor of the Bank of Japan (BOJ) Masaaki Shirakawa. On the occasion of these three meetings, we discussed the current economic situation in Japan, and of course, the increase of the consumption tax, which is a project that the IMF has always supported and for which I had a chance to personally congratulate the Prime Minister on. We also had a chance to discuss the general global economic outlook, in particular, the situation in the eurozone, including my understanding of the latest development last Thursday and Friday at the European Council. We also were able to review our good cooperation for the preparation of the Annual Meeting of the IMF and the World Bank in October, which many representatives, numbers vary between 15,000 and 20,000, will be attending. Those are the three big areas of discussions we had with Mr. Prime Minister, the Minister of Finance, and the Governor of BOJ.

Apart from that, I gave a presentation at the Nikkei event that just took place that maybe some of you attended. I will be holding a dinner tonight with Japanese women leaders with whom I will compare notes and share my views about the role of women in the economy and the world of finance. Tomorrow, I am addressing the students of Keio University. I think that is pretty much my schedule, without forgetting of course the review of the facilities, the services, the availability of rooms, the security, the traffic issues – all the nitty-gritty details that can make the difference between an Annual Meeting that works well and an Annual Meeting that does not work well. So I will myself as the Managing Director of the IMF, together with the head of the Secretariat Department of the IMF and everybody from the IMF associated with the preparation, will be reviewing the details of that in the next two days before I depart for Jakarta on Sunday morning. Voila, you have an idea of what we will be doing. If you have questions, I will be very happy to take groups of questions, three at a time, so many can ask questions rather than not so many. Alright?

QUESTIONER: Welcome to Japan, Madame Lagarde. The weather is a little bit disappointing, but I hope that the hospitality of the Japanese people will improve your impression of Japan. I have two questions. Today, you indicated that in the next World Economic Outlook, you will lower the growth prospect worldwide perhaps. While I understand you will not give us any numbers, can you give us a sense by region, such as the eurozone, the United States (US), and Japan? Also, what is your reaction to ECB’s decision yesterday to cut the interest rate to a record low and what is your view on the potential impact on the European economy?

QUESTIONER: It is wonderful to see you again, Madame Lagarde. Two questions regarding Japan on the value of the yen. There is a lot of talk in Japan that the yen is overvalued. What is your view on the current value of the yen? You mentioned the consumption tax. Can you share your thoughts on the ongoing process of raising the consumption tax? There is a lot of opposition. Can you tell us why we should raise our consumption tax?

QUESTIONER: Welcome to Japan, Madame Lagarde. I have a question on the Trans-Pacific Partnership (TPP). In the lecture you gave earlier, you mentioned the importance of Japan becoming a member of TPP. But as you know, TPP is not very welcomed by everybody in Japan. Can you give advice to those who oppose TPP in Japan and advice on what is the merit of being a member of TPP?

MS. LAGARDE: Thank you to the three of you for your warm welcome. As you mentioned, the weather is not perfect and it is warm and the hospitality of the Japanese people is even warmer than the weather. It really goes to my heart and to all of IMF people’s hearts to be greeted in such a way and to see how everybody who is associated with the event of the Annual Meeting is so keen to make sure that it is a great event and one that will really display Japan and Japanese skills and qualities at their best.

As you mentioned, I am not going to give any number. As you know, the World Economic Outlook is revised quarterly. The last revision dates back to April, so the next one will be in mid-July. As I mentioned, it is tilted to the downside. Titled means that there is not an enormous variation, but it is a negative variation. Clearly, certain regions of the world are a little more affected than others. I will say no more than that – otherwise, you will be guessing what the ratio is.

On ECB’s decision, I have noted like you that with a 25 basis point reduction – it is the lowest ever interest rate set by ECB, which should give a signal to all economies in the zone. I think relevant as well and not as much mentioned is the decision that has been made concerning the deposit rate that is enjoyed by banks in order to stimulate the inter-banking market, which is not as active as it should be. I think that is an important part of the decision that was made. As is often the case, it takes a bit of time for markets, investors, and bankers to actually digest completely the outcome of such decisions.

The yen valuation. We have said very clearly in our review of the economic situation in Japan that in our assessment, the yen was moderately overvalued. And we stick to that. “Moderately overvalued” are the two magic words associated with our assessment of the yen. I also mentioned earlier this morning that if there was further deterioration of the world economic situation, particularly arising out of developments in the Euro crisis, this might have an unwelcome currency effect on the yen, which would yet again be used as a safe haven, and therefore, would be further overvalued.

Now, on the consumption tax, the IMF has always encouraged that reform is welcoming it, and is really commending Prime Minister Noda and his government, including Minister Azumi, for their courage in taking the issue to the Diet and in pushing this reform through. Why? First of all, because it has been in the making for a long time, and many governments have thought about it but not many have actually decided to jump ahead and conduct the reform. Second, because it anchors in the medium-term, reforms that will be important to increase the revenue of Japan, and therefore, to reduce its deficit. It does not enter into effect right away. There is a timeframe that is set. That timeframe is useful for people to prepare, and it certainly gives the economic measure that will be made. So the timing is appropriate. The measure in and of itself is appropriate as well for the reason that I just mentioned. Increasing revenue on a very broad basis with a reasonable rate will actually allow the deficit to reduce over time. It will not be sufficient in and of itself to completely address the issue. More measures will have to be considered, but it will be a very important step in that direction. And reducing the deficit means in the longer term reducing debt, making the Japanese economy more agile and more efficient.

Your third question on, I think it was on TPP – what I know is that opening trade, liberalizing trade, and making sure that there is fluidity of transactions over products and services has generally proved beneficial for those who participate in this freer, opened-up, better liberalized trade movements. So I think it is now demonstrated that it is favorable to the economies that participate in it rather than those who are excluded from the movement.

QUESTIONER: Japan and China pledged to make contributions to IMF’s financial resources, but the U.S. has not made a pledge. There are questions with regard to whether the European recovery can actually be achieved under those circumstances. What are your thoughts on this matter?

QUESTIONER: A two-part question if I may. A very large part of the Japanese government debt is funded internally – more than 90% – as you know. Of course, Japan has not encountered a fiscal crisis as yet. Do you think there is a case for encouraging governments in Europe and possibly elsewhere to create institutional investment structures and so on that encourage a higher level of government debt to be funded internally in order to overcome the impact of volatile capital flows and so on? And do you think that the market needs to take a more liberal view of government debt levels given that probably further fiscal stimulus is going to be needed before this crisis is finally played out?

QUESTIONER: I have two questions. First, China yesterday cut interest rates, while the ECB cut rates and BOE expanded the asset purchase program. Do you think it was a coordinated move? Also, do you think this will be sufficient to promote growth in those nations, particularly in China? What other fiscal supports do these actions require? Secondly, in this environment, BOJ is going to meet next week. Do you think BOJ should ease more to support the economy?

MS. LAGARDE: On your question about the contribution to the added resources of the IMF. First of all, I am very grateful to those members who have decided to contribute. Not all of them have, but many of them have. We have together added the resources by what I call my good sweet, US$456 billion. I was particularly grateful to Japan, which was the first mover, who also participated in the effort of bringing others along. Some countries decided not to contribute. It is their choice. Some of them contribute in different ways. When you take the US, they have extended swap lines with central banks. That is another way of also participating in the effort. If you put all the resources of the IMF together, we exceed the trillion dollars. If you include the committed, the non-committed, and the additional resources, we are north of trillion dollars. I regard that as significantly enhanced resources in order to respond to the needs of the entire membership – not just Europe, the entire membership.

Now, I am not sure to your question about the more or not more liberal approach that markets should take about government debt, but a lot of the work that has been done by scholars, professors, and highly-reputed economists seems to indicate that when governments go north of 80% debt-to-GDP ratio, they take a significant risk, and their growth is impaired by the weight of their debt. So I am not sure that it is a market issue, but certainly that is the result of the empirical work that has been done so far. And when you have countries of Europe going close to 90%, sometimes in excess of 80%, such as Italy for instance, let alone those countries that are currently on the program, or when you look at the volume of debt-to-GDP of the US – close to 100%, I think that serious measures in terms of debt reductions have to be considered over a certain period of time of course. But there are not multiple ways to reduce debt if the service of the debt is to be maintained. That is deficit reduction. Our new alternative or creative instruments to be created in that respect – I’m sure you have in mind some of those strange animals that do not exist at the moment in the form of Euro bills, Euro bonds, Euro projects, for instance – and this is ultimately the goal that a better united eurozone should look for. But although we are certainly advocating that fiscal unity dimension, the Euro-area partners are not there. They are building the banking union for the moment, and I hope they will be shortly after that look at the fiscal union.

Central banks are moving within half an hour of each other or maybe 15 minutes of each other. That is great news for the commentators. I do not know whether they coordinated their action. Maybe they did. Maybe they did not. But they are clearly facing similar issues, which is how can monetary policy help in the context of sustaining and enhancing growth. That is what they have been doing – dealing with the deposit side, dealing with the interest rate side as well, and looking at more alternative programs, such as the Bank of England. Will it be sufficient? Monetary policy is a necessary component of a policy mix that must also include other elements, such as macroeconomic policy, including fiscal consolidation, including growth enhancing measures, such as structural reforms. I mean all of that is tied if you will. I am sure that BOJ will independently take the measures that it has to take to face the situation. It has proven in the past that it can react, that it can change course, by taking an inflation target for its monetary policy and by doing what is necessary to reach that target in the best possible time.

QUESTIONER: I have one follow-up question on the currency issue. You mentioned that the Japanese yen has been overvalued. If the yen exchange rate moves disorderly, is it OK for Japan to use yen-selling intervention in order to prevent the strong yen from impacting the Japanese economy?

QUESTIONER: First of all, I am not sure if the China question was completely answered. Are you comfortable with People’s Bank of China’s rate cuts? Is that enough to prevent a slowdown? Also, is the yuan appreciating at an acceptable rate? A second question, how surprised were you by Jun Azumi’s assertion that Japan is a role model for a sound fiscal policy given that the tax increases may not get passed the election and he said the other day that unless more reconstruction bonds are issued, the country may run out of money?

QUESTIONER: My question is about the European situation. Despite their continued efforts, the European leaders have so far failed to address market concerns. What do you think they have to do next? Can we expect any significant progress in the efforts ahead of the IMF-World Bank meeting in Tokyo?

MS. LAGARDE: The assessment by the IMF is very clear – it is two words, “moderately overvalued.” That is our assessment of the currency relative to the fundamentals of the economy. You mentioned intervention that took place in case of increased volatility. To the extent that macro prudential measures have been taken, have been exhausted, intervention, provided that it is duly concerted with other colleagues, is justifiable. That is the line that we have taken.

Concerning the People’s Bank of China, my response is my response. It might be insufficient from your perspective, but that’s what it is.

My Japanese is not good enough to have actually understood that Mr. Azumi was prescribing that Japan was a role model for fiscal policy. That may very well be what he said in Japanese. I did not hear that in the Japanese translation. Be that as it may, if the reference was to the principle of consumption tax, in other words, a reasonable rate applied to a very large base – I would agree that this is a very good, solid way to address fiscal consolidation needs. It is not in and of itself sufficient, even at not only 8 but 10%. Other fiscal measures will have to be considered in due course, but it is certainly a very brave move toward deficit reduction, with, as I said, an indirect taxation tool that has proven to be extremely efficient in other countries. I do not know if it will not pass the House as you said. What I observe is that it has passed with a significant majority at the Lower House. It has to go to the Upper House. I am sure that political commentators will be discussing who is going to vote for whom and who is going to dissent and who is going to rally or resign – I think what is important at the end of the day is that the right economic and fiscal policies are decided, demonstrated, and explained to people so that they understand why these measures are taken. Certainly, as I said, the IMF has always supported this measure, which we believe will help a great deal.

You asked me about progress in the eurozone. It might not be to the absolute satisfaction of the markets, but we have observed over time that this is the way the Europeans progress, this is the way the eurozone is reinforcing its architecture and developing its cooperation. We, at the IMF, have always advocated that in addition to the firewall that we pushed for in addition to the central bank interventions, which were welcomed, a much stronger and better united eurozone was necessary – not just a currency zone but also a banking union and a fiscal union. But clearly, the Europeans have decided to move ahead with their banking union. They have to implement, implement, implement. It is difficult when you have 17 sovereign states who are trying to do that collectively. The next stage in our view will be the fiscal union, which has to also supplement the monetary and the banking union.

Thank you very much.


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