November 2001 IMFC Statements
IMFC Ottawa Meeting
Japan and the IMF
Statement by H.E. Masajuro Shiokawa|
Minister of Finance of Japan
at the International Monetary and Financial Committee Meeting
November 17, 2001
Affected by the terrorist attack on the United States on September 11, the world economic situation has changed significantly and there is increased uncertainty about the outlook. The World Bank-IMF Joint Annual Meetings scheduled for the end of September were cancelled. However, the fact that the the International Monetary and Financial Committee is meeting today to discuss the world economic situation and the issue of combating the financing of terrorism is clear evidence that the international community has not surrendered to terrorism. The significance of this meeting cannot be overstated. I would like to express my sincere thanks to the Canadian authorities who kindly offered to host the meetings despite the sudden decision to change venue and to the managements and staffs of the World Bank and the IMF who organized the meetings.
I. World Economic Outlook
Even before the events of September 11, the world economy had been slowing down because of negative developments such as the deepening of adjustments in the IT sector. As a result of September 11, the world economy is now showing signs of a synchronized slowdown. In addition to the direct effects of the terrorist attacks, there have been indirect effects on sectors such as travel, air transport, and tourism, which have become sluggish throughout the world, and weakened confidence about the future development of the economy has led to lowered consumption. These factors could delay the resumption of world economic growth.
The fundamentals underpinning world economic growth remain robust, however. In major economies, i.e., the United States, Japan, and Europe, monetary authorities injected ample liquidity soon after the terrorist attack, and decisive actions in the form of monetary and fiscal policies to support the economy and structural reform to help realize potential growth have already been taken. Notwithstanding the remaining short-term uncertainties, it is expected that these measures will begin to show results beginning next year, and will contribute to the improvement of the world economic outlook. It is important for each country to maintain sound macroeconomic and structural policies that will contribute to sustained economic growth and sound financial markets.
The development of the U.S. economy from now on is extremely crucial not only for the United States itself but also for the rest of the world, and I strongly hope that the effects of the U.S. authorities' active fiscal and monetary policies will shortly become evident and that the economy will recover soon. In the euro area, expansionary policies within the stability pact framework need to be implemented. At the same time, in order to maintain medium-term growth, structural reforms aimed at improving productivity are essential, including efforts to reduce labor market rigidity.
Concerning emerging market economies, international assistance for countries that were experiencing a marked deterioration in their economic and financial positions, such as Argentina and Turkey, was already being given before September 11. Since then, the surrounding environment has worsened considerably, as access by these countries to international capital markets has become more difficult. Against this background, further efforts by the authorities of these countries, including promised measures to maintain strict fiscal discipline, are needed to restore market confidence. For member countries that are making necessary efforts at reform in concert with the international community, the IMF should provide appropriate assistance.
The emerging market economies in Asia depend heavily on the export of IT-related products, and they have been seriously affected by the slowdown of the world economy. In addition, these countries may also be affected by economic crises in emerging market economies in other regions. They have, however, made progress in financial sector reform, and have also moved to a flexible exchange rate regime, increased their foreign currency reserves, and lowered their short-term debt ratio. These achievements have provided these countries with an economic structure that will enable them to deal with potential crises, and I think that the possibility of their being greatly affected by crises in other regions is limited.
Low-income countries have also felt the effects of the terrorist attack, mainly through the worsening of the global economic environment including financial markets. While it goes without saying that each country must make its own efforts to overcome these difficulties, the IMF should do its part to help. In addition to giving policy advice and technical assistance, the IMF should support countries that are pursuing appropriate policies in their fight against poverty by providing financial assistance including through the Poverty Reduction and Growth Facility (PRGF).
Last but not least, the launching of a new work program of multilateral trade negotiations has just been agreed at the World Trade Organization (WTO) Ministerial Conference in Doha, Qatar. During this critical period of synchronized slowdown of economic activities throughout the entire world, the significance of this agreement cannot be overemphasized as it will strengthen the multilateral free trading system and restore confidence in the world economy.
The Japanese Economy
The Japanese economy continues to deteriorate, experiencing negative growth in the second quarter of this year. As the economic slowdown becomes evident throughout the world, and in the U.S. in particular, Japan is seeing its exports and industrial production fall significantly. Corporate profits and business investment are also declining. Private consumption has dropped off and employment conditions have further deteriorated. The unemployment rate has reached its highest level ever at 5.3 percent.
The Japanese economy is also suffering from deflation--a continued decline in prices--which is clouding the business outlook and increasing personal and corporate debt in real terms.
There is growing concern about the economic prospects, since a decline in corporate profits will likely further reduce business investment, and the global economy is slowing down in a synchronized manner partly because of the terrorist attack on the U.S.
The Japanese economy does have growth potential, however. In order to realize this potential, it is necessary to accelerate the structural reforms outlined in the "Basic Policies for Macroeconomic Management and Structural Reform of the Japanese Economy." Japan recognizes that there can be no revival and advancement of its economy without structural reform. While committing itself to proceeding with structural reform along the lines of the "Reform Schedule" over the medium and long term, the Japanese government also formulated the "Advanced Reform Program" last month, which covers measures that need to be decided and implemented in advance of other reform measures. This program does not put emphasis on public works projects. Instead, it focuses on institutional reforms to invigorate the economy and generate new industries, and on measures to address the issues of employment and small and medium enterprises, as well as other urgently needed measures directly aimed at accelerating structural reform. A supplementary budget that includes these measures has been approved by the Diet. I think that these efforts will put the economy on a self-sustained growth track led by private demand.
Regarding the disposal of non-performing loans (NPLs), which is one of the structural reform initiatives, we intend to normalize the situation within three years from now, when the special adjustment period ends. To this end, we will take various measures to enhance and intensify the final resolution of NPLs, including the introduction of special inspections that will improve the accuracy of banks' self-assessment of their assets, and drastic enhancement of the functions of the Resolution and Collection Corporation.
The focus of fiscal policy is shifting from the demand-stimulus measures that were used in the past to measures aimed at structural reform. The FY2002 budget is targeted to limit the amount of government bond issues to 30 trillion yen or less as a first step toward comprehensive structural fiscal reform. A thorough review will be made of expenditures in all areas and expenditures will be prioritized accordingly.
On the monetary front, the outstanding balance of current accounts held in the Bank of Japan was increased by 1 trillion yen in August in line with the quantitative target set under the new policy framework adopted in March. Since September 11, the Bank of Japan has provided abundant liquidity, aimed at maintaining the balance of the current accounts above 6 trillion yen. We continue to make every effort to prevent prices from continuing to fall, and to lead the Japanese economy back onto a stable and sustainable growth path.
II. The Role of the IMF
The IMF has been taking a number of steps to reform itself in light of the lessons learned from the Asian Crisis. Progress has been made on various fronts, including improved crisis prevention through strengthened surveillance and the establishment of new facilities such as the Supplementary Reserve Facility and the Contingent Credit Line.
At this current juncture of heightened uncertainty in the world economy, it is a primary responsibility of the IMF to provide appropriate financial assistance, using the tools it has available, to member countries that have been making necessary reform efforts in cooperation with the international community. To fulfill this responsibility, the IMF must be equipped with sufficient liquidity.
Regarding the Poverty Reduction and Growth Facility (PRGF), whose purpose is to provide loans to low-income countries on a concessionary basis, how to secure its loan resources after next year has long been unresolved. Following the events of September 11, there is a need for the international community to provide assistance to those countries neighboring Afghanistan whose economies have been most severely damaged, and the IMF is expected to contribute to those countries through the PRGF. There was a concern that unless this issue is resolved, it could be difficult to provide sufficient resources under PRGF arrangements to those countries including Pakistan.
Japan has made the largest contributions among the IMF member countries to the original and enlarged PRGF loan resources and interest subsidies. Recently, in light of the urgent economic situation following the terrorist attacks, we decided to provide a further 1 billion dollars to the PRGF loan resources. I hope this contribution will enable the IMF to provide needed PRGF loans promptly and in sufficient amounts.
As for the General Resources, fortunately the IMF considers that it has sufficient resources to respond to prospective demand for the next year or two, given the current liquidity situation and the fact that these resources can be supplemented by activating the New Arrangements to Borrow (NAB) and the General Arrangements to Borrow (GAB).
In just one month, however, from the end of August to the end of September, the IMF's liquidity ratio dropped substantially, from 150 percent to 105 percent. Given the rising uncertainty in the global economy following the events of September 11, it is possible that this rapid decline in the liquidity ratio, which began before the attack, will continue, depending on future developments. From this standpoint, when we undertake the twelfth general quota review, which should begin at the latest next January, it is important to aim at securing ample resources to be able to provide adequate assistance to member countries in difficulty for the next five years. A quota increase of proper size should be agreed as a result of the review in order to reassure member countries and enable them to manage their economies appropriately.
In deciding the quota increase, we need to ensure that quota allocation, voting power, and representation in the Executive Board reflect developments in the global economy. In past general quota increases, the practice was to distribute a large proportion of each increase according to existing quota shares. This practice has to be reviewed, since it has been a major cause of the delay in correcting the discrepancy between members' quota shares and their economic position. In addition, a review of basic votes, which has not been done since the IMF was founded, should be considered.
III. The Fight against the Financing of Terrorism
The events of September 11 have made it clear that combating the financing of terrorism is essential for the stability of the global economy and the soundness of the financial system. Fighting terrorism has become one of the most important international efforts, and the international community should cooperate in taking every possible measure to block terrorism financing.
I welcome the IMF's decision to participate in this fight against the financing of terrorism. Japan expects the IMF to actively contribute to the effort, while avoiding duplication of work with other organizations, and making use of its comparative advantage.
Implementation of the UN Security Council Resolutions is important. Japan has taken measures on several occasions to freeze funds and other financial assets of those associated with the Taliban, following UN Security Council Resolutions 1267 and 1333.
All countries should immediately ratify the UN convention on the Suppression of Terrorist Financing. Japan signed the convention last month and is now working towards its ratification as soon as possible.
At the extraordinary plenary meeting held last month, the Financial Action Task Force (FATF) decided to expand its responsibilities to include the fight against the financing of terrorism and issued its special recommendations on combating terrorism financing. This is great progress, and I heartily welcome it. I expect each country to take appropriate measures to implement the recommendations so that a meaningful outcome can be achieved to curb the financing of terrorism. To this end, Japan will also make its best efforts.
For our part, the Japanese government has established a Task Force of Intelligence and Countermeasures against Terrorist Financing under the Emergency Anti-Terrorism Meeting among Relevant Ministries and Agencies, whose function is to ensure the exchange of necessary information to suppress terrorism financing and coordinate countermeasures among relevant government ministries and agencies. We intend to work closely with organizations and institutions in other countries that are pursuing the fight against the financing of terrorism.
Japan has also been participating in efforts to lead the fight against terrorist financing through various frameworks such as the G7 and the G20. Last month, Japan hosted a meeting of the Asian and Pacific countries that participated in the regional meeting of the Financial Stability Forum in Tokyo, to exchange views on measures to counter terrorist financing. It is important that we continue to call on every country in the world to cooperate in the efforts to eliminate such financing.