2002 Annual Meetings of the IMF and the World Bank Group
September 28, 2002
Documents Related to September 28, 2002 IMFC Meeting
Japan and the IMF
Statement by Hon. Masaru Hayami
Governor of the Bank of Japan
and Alternate Governor of the IMF for Japan
International Monetary and Financial Committee
Washington, D.C., September 28, 2002
I. The World Economic Outlook
Although the overall recovery trend of the world economy is expected to continue, the recent sharp fall in global equity markets, together with high oil prices, has caused some uncertainties, and we need to be vigilant about the situation ahead.
The recent sharp fall in global equity markets reflects changes in investor sentiment in response to the recent series of corporate accounting scandals. Such a market environment poses a risk to the world economy. In order to restore market confidence, stricter accounting and auditing systems and better corporate governance are called for.
Amid heightened uncertainties in the world economy, the situation in Latin American countries is a source of particular concern. In this context, we welcome and support the timely decision by the IMF and the World Bank to provide financial assistance to Uruguay, Brazil, and other countries. To make this assistance effective, however, sound economic policy management by these countries is essential. We hope that these countries' efforts will lead to an early restoration of market confidence and that their economies will return to a path of sustainable growth.
Although the Japanese economy is still in a difficult situation, there are signs of recovery such as an increase in exports and the recovery of production. Although we cannot rule out the possibility that the uncertain prospects of the world economy could adversely affect final demand in Japan, we will decisively and expeditiously pursue fiscal expenditure reform, tax reform, the disposal of non-performing loans, and other structural reforms, with a view to achieving sustainable growth led by domestic demand.
Specifically, we will pursue the following three policies in an integrated manner: (i) an "economic revitalization strategy" to restore competitiveness; (ii) "tax reform" to reinvigorate society; and (iii) accelerated fiscal expenditure reform, including enhancing the efficiency of fiscal expenditures, with the aim of achieving "a small government worthy of bearing the costs". Under the economic revitalization strategy, in order to achieve a vibrant society, we will actively implement deregulation while outsourcing the operations of public corporations to the private sector and promoting privatization wherever possible, thereby widening the scope of the private sector's activities. With regard to tax reform, we will frontload tax reductions in order to revitalize the economy. In fleshing out the details of the tax reform, we will maintain revenue neutrality on a multi-year basis with a view to maintaining so as to maintain fiscal discipline. We will intensify tax incentives for research and development and investment. We will also reform the inheritance and gift taxes to promote the transfer of assets to future generations. In the area of fiscal expenditure reform, we will make every effort to reexamine all types of fiscal expenditure, prioritizing and streamlining public investments and establishing a sustainable social security system through public pension reform. In addition, in reallocating the budget, we will put more emphasis on the "Four New Priority Areas," aimed at achieving a more vibrant society.
In addition to these structural reform efforts, the resolution of the non-performing loan problem is essential for establishing a vigorous and stable financial system. We will accelerate the disposal of non-performing loans based on a strict evaluation of assets, taking into account the outcome of the special inspections of major banks conducted by the Financial Services Agency. At the same time, after lifting the current blanket deposit protection system, we will take necessary measures to maintain the stability of the financial system by providing a type of deposit ("payment and settlement deposit") that will be fully protected in the event of a failure of a financial institution, in order to ensure the stability of financial payment and settlement functions.
In order to achieve growth led by domestic demand, deflation must be stopped. Although the Bank of Japan has been providing ample liquidity, deflation still continues. The BOJ, together with the Government, intends to make further bold efforts to cut off deflation.
Recent volatile movements in foreign exchange markets, including the appreciation of the yen, could have adverse effects on the recovery of the Japanese economy as well as the world economy. Based on our view that exchange rates should move in a stable manner reflecting economic fundamentals, we will continue to monitor the markets closely and take appropriate measures as necessary.
The Bank of Japan has recently embarked on studying a measure that would reduce the volatility risk stemming from financial institutions' shareholdings. It is expected that this measure will contribute to the stability of the financial system.
II. Strengthening of the International Financial System
Based on the experience of the Asian financial crisis, discussion has taken place in the IMF and other fora on how to strengthen the international financial system. Within the IMF, progress includes the quota increase under the Eleventh General Review of Quotas in 1998, the establishment of the New Agreements to Borrow (NAB), and reform of lending facilities including the introduction of the Supplemental Reserve Facility (SRF). However, since last year, there have been a number of cases that have required large-scale international financial assistance in Argentina, Brazil, and other Latin American countries. These crises point to the need for enhanced measures for crisis prevention and resolution.
Regarding crisis prevention, the strengthening of IMF surveillance is a matter of central focus. We expect that surveillance will be strengthened, focusing on its core areas of macroeconomic policy, capital movements, and the financial sector. Recently, the Financial Sector Assessment Program (FSAP) was introduced by the IMF to evaluate the soundness of countries' financial sector. Japan announced last fall its intention to accept the FSAP, and the assessment process started in June. At the same time, the IMF's work on implementing international codes and standards is making progress, and a Report on the Observance of Standards and Codes on Fiscal Transparency for Japan was published last year. We hope that many countries will follow us in accepting such international efforts with a view to contributing to crisis prevention.
In formulating lending programs, it is essential for the IMF to set necessary and appropriate conditionality in extending assistance to policy adjustments of borrowing countries. We welcome the recent adoption by the IMF's Executive Board of the new guidelines on conditionality, which emphasize the importance of the ownership of the borrowing countries and of keeping its conditionality to a minimum. The IMF should continue to analyze how much this change in conditionality policy contributes to improvements in program design and performance and, if necessary, continue to study the possibility of further improvements of the guidelines.
In resolving crises, private sector involvement (PSI), including sovereign debt restructuring, has sometimes been necessary. In order to secure an orderly debt restructuring process, some legal frameworks have been proposed to clarify the debt restructuring procedures. For example, Ms. Krueger, the IMF's First Deputy Managing Director, proposed in November 2001 a majority-based decision-making process based on a statutory framework such as a treaty. This proposal is now being discussed at the IMF and other fora. Such a statutory approach is ambitious and requires further continuous examination. Also being studied is a contractual approach, which calls for majority-rule provisions and litigation-restricting provisions in debt contracts. We hope that both bond-issuing countries and market participants will recognize the importance of such provisions and that they will widely be introduced. It is particularly important that such market practices be commonly used in markets like New York, where a large amount of international sovereign debt is issued. Both approaches should be examined in a complementary manner in order to achieve more orderly debt restructuring.
Discussion is underway in the IMF on its lending into arrears policy. It is important for all parties to make efforts to promote the resolution of debt issues by enabling the IMF to lend into a debtor's arrears to private creditors, provided the debtor makes a good faith effort based on such principles as early dialogue, timely information sharing, and an early opportunity for creditors to give input on the restructuring strategies.
Recently, access to IMF resources beyond the normal limits has been granted quite frequently as part of the response to the financial crises in Argentina, Uruguay, Brazil, and other countries. But given the limited availability of the IMF's resources, we need to adopt appropriate lending rules to restrict lending beyond normal access limits to truly exceptional cases. Furthermore, in approving exceptional access, the IMF will need to base its policy advice on realistic scenarios under which the economy would return to a sustainable growth path in the medium term as well as conduct in-depth analysis on debt sustainability
Intensive discussion has been taking place under the Twelfth General Review of Quotas before the deadline of end-January 2003. Given the significant increase in abrupt movements of capital across borders in the global economy, it is imperative for the IMF to maintain a sufficient level of resources to prepare for future crises. The risk would be grave if the IMF were to run out of financial resources. In order for the IMF to be able to respond appropriately to financing requirements during economic crises, it has to have sufficient financial resources. Particularly after the recent large-scale financial assistance to Brazil and other Latin American countries, the IMF's usable resources are at very low level, and we hope for an urgent decision on a quota increase. In the process of the quota review, reallocation of quotas should also be examined, in view of the fact that current quota shares do not properly reflect changes in the global economic environment. Since the IMF's quota serves as the basis not only for the amount of the IMF's lending but also for important management decision such as the election of Executive Directors, it should reflect the current situation of the world economy. For example, if we look at the quota share of Asian countries (ASEAN, Japan, Korea and China), which have developed rapidly in the past few decades, we see that their calculated quota share based on GDP and other indicators is 22 % whereas their actual quota is only 13 %. Such a huge discrepancy between calculated quota and actual quota surely cannot be justified.
Strengthening Regional Cooperation in Asia
Since the financial crisis of 1997, the East Asian region has made progress in regional financial cooperation, a network of mutual swap arrangements. Japan is implementing the Chiang Mai Initiative, which is proposed at the ASEAN+3 Finance Ministers Meeting in May 2000. In order to make such swap arrangements more effective, it is important to enhance the exchange of views and policy dialogue on regional economic developments. It is also important to discuss mechanisms for exchange rate stability in the region from a medium- to long-term perspective.
III. Measures against the Financing of Terrorism
One year has passed since the tragic events of September 11. Various measures to fight against terrorism have been taken by the international community. We welcome the progress made by the IMF and the World Bank toward the inception of the assessments using the comprehensive AML/CFT (anti-money laundering and combating the financing of terrorism) methodology covering the FATF40+8 recommendations. Once this assessment begins, none-FATF member countries are encouraged to accept the assessments.
Japan has made far-reaching efforts to freeze the assets of terrorist and those who provide them with financial support, reflecting the importance that it attaches to combating the financing of terrorism. To that end, Japan has been taking a series of blocking measures against the assets of those who support terrorists, including joint actions by the G7 countries. By June, a set of laws to combat the financing of terrorism, which was required to domestically implement the International Convention for Suppression of the Financing of Terrorism, was approved by the Japanese Diet, and thus the Government formally accepted the Convention. In order to fight terrorism, it is essential for all countries and relevant international organizations to continue to cooperate in taking measures to combat the financing of terrorism.
Lastly, I would like touch upon the modalities of the Annual Meetings. This year's abbreviated annual meetings provide a good opportunity to review the modalities of the annual meetings and other related meetings and we should think of ways that will enable us to have more substantive discussions. The IMF-World Bank Annual Meetings offer a valuable opportunity for economic policy leaders of member countries to convene in one place. It is therefore important to continue to consider ways to achieve more fruitful outcomes within a limited time available. With regard to other international meetings, we should discuss ways to make the management of these meetings more effective and efficient by getting back to the original purposes of each meeting and examining whether it continues to be necessary.