Japan and the IMF
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Managing Director’s Statement to the Interim Committee
on Issues Relating to the World Economic Outlook,
Including the Causes and Effects of the Asian Crisis
Washington, D.C. - April 16, 1998
Members of the Interim Committee have received my note on the World Economic Outlook, and my full statement on issues relating to the world economic situation and outlook. This would normally have been an occasion for discussing the role of the euro for the international monetary system, but this important topic will have to wait until our next meeting in the fall. Instead, I will concentrate on the Asian crisis.
- The crisis has now begun to abate thanks to the adjustment and reform efforts undertaken by the most affected countries, with the support of the international community. However, just as the financial situation has begun to stabilize in several of the crisis economies the regional outlook has been clouded anew by the further deterioration of the economic situation in Japan.
- Despite these difficulties, the global outcome still appears likely to be a relatively mild slowdown in the world economic expansion, thanks to strong growth momentum in North America and increasingly also in Europe, and to the progress in many developing countries and among the transition countries in strengthening their fundamentals.
- There are nevertheless important downside risks. Policy slippages in the crisis economies could again unsettle financial markets. Furthermore, the crisis and recent commodity price movements, particularly the decline in oil prices, will bring about some large adjustments in external positions and risks of trade tensions.
- There are also risks arising from financial market developments in the industrial countries. Equity markets in many countries have recently risen to new highs, and the US dollar and pound sterling have strengthened further, developments that may not be sustainable. Further risks arise from financial sector fragilities and other vulnerabilities in a number of emerging market countries.
- The countries at the center of the Asian crisis have been among the most successful emerging market countries. What went wrong? To some extent these countries becamevictims of their success, which had ultimately made large demands on policies and institutions, demands that were not met with sufficient resolve. The many policy weaknesses that have been revealed by the crisis are now in the process of being addressed in the context of Fund-assisted programs.
- The stresses caused by the crisis are beginning to be evident in a substantial compression of investment, consumption, and imports in the economies at the center of the turmoil. These countries are experiencing a sizable turnaround in external positions, which will be reinforced by stronger exports. This will help to offset the declines in domestic demand but output is still likely to decline in Indonesia, Korea, and Thailand in 1998.
- As the needed policies are implemented and external positions improve, however, confidence should recover gradually during 1998, paving the way for a moderate rebound in growth in 1999 and solid recovery by 2000. This is a realistic and feasible outcome provided policymakers are prepared to address the root causes of the financial crisis.
- In a worrying setback, the situation in Japan has deteriorated further, reflecting the impact of over-rapid fiscal adjustment and intensifying financial strains as well as the effects of the regional crisis. To lift the Japanese economy, and allow it to support activity elsewhere in the region, forceful and credible actions are needed to strengthen confidence, restructure the financial system, and move forward on the structural reform agenda.
- The Asian crisis has again demonstrated the potential for a crisis that originates in one country to spread quickly to other countries that may have enjoyed a strong economic performance in the past but nevertheless have become vulnerable to shifts in market sentiment. Identifying and addressing such vulnerabilities before a crisis hits remains a key challenge for national policymakers and for the IMF.
IMF EXTERNAL RELATIONS DEPARTMENT