Horst Köhler
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Transcript of a Press Conference by Horst Köhler
Managing Director, International Monetary Fund
Imperial Hotel, Tokyo, Japan
February 25, 2004

Mr. David Hawley, International Monetary Fund (IMF): Good afternoon, ladies and gentlemen. Welcome to this press conference of Mr. Horst Köhler, the managing director of the International Monetary Fund (IMF), at the conclusion of his visit to Tokyo. My name is David Hawley and I am from the IMF press office. There is simultaneous interpretation into Japanese and English of the press conference on the channels identified on this screen. If you are called to ask a question, I would be grateful if you would wait for the roving mike to be brought to you and when you ask a question, please state your name and news organization.

Allow me to begin by introducing the panel. At the center of the table is Mr. Köhler, the managing director. To my right is David Burton, the director of the IMF's Asia and Pacific department. At the far right is Mr. Hiroyuki Hino, the director of the IMF's regional office for Asia and the Pacific here in Tokyo. Before taking questions, I think the managing director would like to make a few opening remarks. Mr. Köhler.

Mr. Horst Köhler, Managing Director, International Monetary Fund (IMF): Thank you, David. Good morning, ladies and gentlemen. It is a great pleasure to return to Tokyo for the fourth time as managing director of the International Monetary Fund. I come away encouraged about Japan's economic prospects.

Yesterday, I had the privilege of meeting with Prime Minister Junichiro Koizumi to hear his views about the progress in implementing economic reforms and future policy priorities. I also had fruitful meetings with Finance Minister Sadakazu Tanigaki, Bank of Japan Governor Toshihiko Fukui, Economic Minister Heizo Takenaka, other senior officials, and Chairman of the Japan Business Federation Hiroshi Okuda.

I welcomed the latest Japanese growth figures, which surpassed everyone's expectations. While the growth partly reflects strong external demand, including from China, it is encouraging that business investment has been contributing importantly to the recovery. The likelihood now is that growth this year will be significantly stronger than previously envisaged, which would help to reduce deflationary pressures. The message from these developments is that Japan's efforts to promote economic recovery, including through structural reforms, are beginning to pay off.

The improved economic outlook has been helped by the Bank of Japan's quantitative easing policy, and I support the central bank's increasingly proactive approach. In addition, good progress has been made in corporate and financial sector restructuring, as reflected in improved profitability in the corporate sector and a steady decline in the banking system's non-performing loans under the Program for Financial Revival. The government has also managed to continue to reduce the high level of public works spending.

Looking ahead, although difficult challenges remain, I agree fully with Prime Minister Koizumi and senior officials that the current recovery in activity both here and abroad is a golden opportunity to press ahead with the reforms that will sustain growth. This will involve continued efforts to bring deflation, which remains a concern, to an end. At the same time, the authorities are firmly committed to tackling remaining financial and corporate sector weaknesses. With the major banks having made significant headway in improving their balance sheets, we look forward to a more broad-based strengthening of the banking system. We also hope the success that many companies have achieved in strengthening their financial health can become increasingly widespread in the corporate sector.

Also essential for sustained growth over the medium term is a reduction in the large fiscal deficit. I welcome the authorities' goal of achieving a primary surplus by the early 2010s. With the economy now recovering, the time is right to embark on this process. Putting the public finances on a sound footing will also require decisive action to reform the public pension system.

So ladies and gentlemen, Japan's economic prospects have clearly brightened. I am confident that continued efforts to carry out structural reforms will lead to sustained growth over the coming years. This will help to sustain global recovery and contribute to the smooth resolution of global imbalances. In this context, I also encouraged the authorities to play a leadership role in moving forward the Doha Round of trade negotiations. So this was my introductory statement, and now I stand ready to answer your questions.

QUESTION: I have two questions. One question is concerning the exchange rate. The IMF has been expressing concern over the global imbalances. Do you think the dollar needs to fall further against the yen and euro to rectify the global imbalances? Another question is concerning the IMF organization. It is about your current term and next term. Almost one year is left for your current term. I would like to know whether you will be pleased if you are reelected to a second term to strengthen the international financial activity. Thank you.

Mr. Köhler: Well, I will start to answer the second question first. This is that certainly to be managing director of the IMF is a fascinating job, and certainly there is an unfinished agenda, at least from my point of view and my vision for this institution. But I should also add to this, I have not yet talked to my wife and this is very important for such kinds of decisions.

To the first question on the dollar to further depreciate. I should not speculate about exchange rate developments. What I should tell you is that at the end we have a good chance to smoothly overcome global imbalances, mainly through strengthening domestic-driven growth. This happens not least here in the process in Asia, including in Japan. So far I do think that I have nothing to add to the many expressions about exchange rate developments. I do think that the developments up to now have contributed to a decline in these global imbalances, but we should concentrate now on strengthening growth not least based on domestic sources of growth.

QUESTION: Do you really think that the growth in Japan is strong and broad-based enough to overcome the still very serious deflationary forces in the economy? Or do you think the Bank of Japan should be taking a more proactive approach towards deflation? Could you also comment on the size of foreign exchange reserves, particularly US dollar reserves, in this part of the world and generally how you regard this very high level of reserves?

Mr. Köhler: Well, to the first question, of course there are always also uncertainties and risks. But what I have learned in these extensive discussions, including with the Governor of the Bank of Japan, is that indeed there is a strong domestic growth momentum led by fixed investment in Japan, which I heard also from the president of Keidanren. This will, in his view, translate also into stronger consumption in the time ahead of us. So we do think that strong net exports, plus now this strong picking up of investment, is a good indicator to expect that this recovery has a good chance to be sustained.

The dollar reserves. Of course, there is one strong argument related to that and that is that it enables the countries here in Asia to move, where it is not yet the case, to more flexibility in their exchange rate policy.

QUESTION: Just sort of a follow-up question. Does that mean that the IMF will tolerate, in your view, or that Japan should end its zero interest rate policy and go back to a normal interest rate structure? That is my first question. Another one is regarding the first question about foreign exchange. Have you discussed with the Japanese authorities about the foreign exchange intervention? Have you given support to that?

Mr. Köhler: In response to the first question, we do think that for the time being, the Bank of Japan should continue with its zero interest rate policy. I was very impressed when the Governor explained to me how they also, looking forward, will discuss this with their vote in the bank. This is that they expect a change in their interest rate policy only when and if the consumer price index is zero or positive for over several months, and second, if there is a majority in the board which expects positive consumer price development. This second element is a kind of pragmatic approach, but I like it very much because it is also based on the judgment of the members of the board. You will always need to have judgment in these kinds of decisions, which should also be based on experience and judgment.

Regarding the interventions of the authorities here in Japan, of course we discussed it. I do think that it was an appropriate policy stance in a situation where the economic policy had not too many options free. Because there was the zero interest rate policy, there was no room for maneuver for fiscal stimulus and there was the risk, and there is still some risk, of deflation. In this context, I do think it was pragmatic, but it helped the interventions to stabilize the financial system and also to help to battle deflation. But I also do think and understand it as a temporary policy stance on the background of these limited options they have available and I also do understand that this intervention is not based on a kind of fixed exchange rate target.

QUESTION: During the early part of this month, in Boca Raton, Florida in the United States, the G7 meeting was held, at which time the exchange rate and economic issues were discussed, and excess volatility has not been seen as desirable. But ever since that statement, we see that a certain reversal of the dollar rate has been observed. Maybe the message sent from the G7 statement has permeated through the market which explains the small fluctuations seen in the US dollar since that G7 statement.

Mr. Köhler: I think we should not look every day at what is now the answer of the markets to a statement that ministers made in Boca Raton. What I would also like to tell you is what they said in Boca Raton. The ministers said, "We reaffirm that exchange rates should reflect economic fundamentals." They also said, "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate." I think this is good language and the authorities should act when there is a need to act. But I would, in this context, underline that all this is good, but it is even better if it is based on a broader concept of how to handle economic policies in the global economy. By this I mean that we need to have a broad, cooperative strategy where all major regions or economies participate.

What we first need, of course, in this cooperative strategy, is an effort by the US to increase national savings over the medium term. Second, we need to have, in my view, an acceleration of structural reforms in Europe and also in Japan. Third, I do think that countries with high current account surpluses, which do not yet have flexibility in terms of exchange rates, should take the opportunity to move to more flexibility in their exchange rates. A fourth element-and this is very important-is that all policy makers should have an interest and energy to avoid increasing tendencies to move toward protectionism. In this context, I reiterate what I said in my initial statement: It is very important that the Doha Round comes back to the negotiating table this year. 2004 should not be a lost year for this multilateral trade round. I am more concerned about tendencies to move toward protectionism, or what Alan Greenspan called "creeping protectionism" than some excitement about daily developments of exchange rates.

QUESTION: In your comments just now about countries moving to more flexibility in exchange rates, I assume that is a reference to China. Could you elaborate on your current view on China's exchange rate policy, and what would be an appropriate time for China to consider moving to more flexibility, and whether pressure on China externally to do something about its foreign exchange system is appropriate?

Mr. Köhler: I do think that it is in the self-interest of China to move to more flexibility. I do think we should accept their decision to think about such kinds of movement in credible steps. So it is a question of how to phase in flexibility, but it is in the interest of China. It is also in the interest of the international community that there is a process to reflect on that and come to a decision. This point I also see in the context of what I called "creeping protectionism." Nobody could and should have an interest that these tendencies are strengthened, and therefore, timely action in this context is appropriate. But I feel it is absolutely inappropriate to conduct this debate mainly via the press. I think this should be a dialogue where each side should listen to the other side and hopefully then come to a decision which complies with mutual interests.

QUESTION: Mr. Köhler, what lesson do you think the Europeans in particular and the world in general can learn from the experience the Japanese have had fighting inflation?

Mr. Köhler: The most important lesson I do think of—I should be careful of always lecturing others with lessons—but I do think what is appropriate is the recognition that attention to development is needed to be able to take timely decisions—decisions which come at the appropriate time. That means not too late, not too early. So far, I do think we can indeed learn a bit from the Bank of Japan because in particular, Governor Fukui has close contact with markets and market participants. He knows that communication of monetary policy is very important so that monetary policy is better understood. He knows that a central banker should be very careful about his talk when he is not able to deliver. All this together, I think, should be reflected not just in Japan or in Asia. It can be reflected in Europe, in the US, and all over the world. Monetary policy is part of a process, always to be sensitive to development in markets, not least also about growth and deflation.

QUESTION: I would just like to ask you two questions. Firstly on yen intervention, you said that at the moment for Japan it is a pragmatic policy to have. However, do you think there is a risk that using intervention as a crutch to prop up exports may hamper efforts on structural reform? Also, in your release you say the likelihood now is that growth this year will be significantly stronger than previously envisaged. Could you be more specific as to what you mean by that?

Mr. Köhler: I do not think that the objective of interventions conducted here in Japan has been to boost exports. In my understanding, and it was also confirmed in what I discussed with the Governor and the Finance Minister, that it was an option taken because of the limited number of other options to avoid spiraling deflation and to secure the integrity of the financial system here. And it worked. It has demonstrated that this priority approach that Mr. Okuda, the President of Keidanren, himself said, "I am kind of satisfied now that the motive for investment is based on structural improvements in our business community." That means profitability, better balance sheets and they got rid of debt. I know also they have restructured their cost basis. This is what I learned: the basis of investment and this new momentum for growth and not an intervention policy for competitive devaluation or competitive exchange rate policy. 

Regarding the growth forecast, I should be cautious, but you may know that our latest forecast in fall last year was around about 2.2%. In our view, the number goes more to 3% and possibly even beyond that.

QUESTION: Looking at the Japanese fiscal deficit, if you look at the next fiscal year's budget, 44.1% comes from the debt issuance. But during the early part of the 2010s, the Japanese government says it would like to achieve a primary balance surplus. Do you think that goal is a realistic, feasible target or not?

Mr. Köhler: It is a feasible target, but there is a need to take action and in particular, to take action to cut spending. In the end, all fiscal consideration is based, at least in my experience, on three pillars. First, of course, there is the finer policy which facilitates and promotes growth. Growth is good for fiscal consolidation. Second, you will not manage fiscal consolidation solidly if you are not tackling, first and foremost, expenditures. If there is a need, then you may also think about the revenue side, but my priorities are in this sequence: first, promote growth; second, tackle expenditures, and then also look to the revenue side for what may be needed and maybe even is helpful as a structural reform to improve the tax system. We would like to clearly see some more specificity in cutting or discipline in expenditures, but I assume that with the clear commitment of the prime minister, this task will be tackled.

QUESTION: You already commented about the Chinese currency renminbi. Of course, the consultations between the United States and China are to start, but with regard to China's renminbi, Mr. Köhler, can you be more specific about the time frame for the changes that are expected to take place within the Chinese renminbi? Can you be more specific about the timing?

Mr. Köhler: I should not speculate about timing. This would look like pressure via the public. My advice was and is to have a frank dialogue with the Chinese officials. Trust them that they can listen to the arguments for why flexibility in the end is the right way to go. We also need to listen to them because they have also questions and points they have to consider. This is not a kind of quick fix coming from the managing director of the IMF or any kind of delegation. It should be taken in a serious dialogue and I add in this context that the international community should always have in mind that China was a very cooperative partner during the Asian crisis in 1997-98. We should not forget that.

QUESTION: We are looking at Europe. Looking at the exchange of the euro, the euro keeps on rising and there must be some complaints coming from Europe. What do you think about the level of the euro? That is my first question. You have also mentioned that the policy options available to Japan are very limited and under those circumstances, intervention had been made. But looking at the European Central Bank (ECB), do you think they should lower the interest rate because there is some room left for them to lower the interest rate? What is your view?

Mr. Köhler: I do think that when I look, for instance, at the fragility of the recovery in Europe of course. A continuously appreciating euro is kind of a problem. My recommendation to the Europeans is still to concentrate first and foremost on structural reforms. There is not enough ambition to accelerate structural reforms and I take this joint presentation of President Chirac, Chancellor Schröder and Prime Minister Blair that they want to be a kind of motor for innovation and structural reform in Europe in order to prop up the European community on the whole. This is the right intention. They need now to lead by example in their own countries. First, to accelerate structural reforms. The kinds of reforms are well-defined and well-known. It is the Lisbon Agenda. It is to really create a truly integrated financial market. It is clearly needed and overdue in Europe to move to more flexibility in labor markets. This is not to threaten workers, but to make their jobs more secure. All this is first and foremost what has to happen. In this context, of course the ECB should be attentive also to the recovery developments. But I do not think it is appropriate to give here, from Tokyo, the ECB advice about the interest rate policy. We should leave it to the board there. But I do think the ECB is part of the economic policy decision making process in Europe to promote growth and stability.

QUESTION: Sorry, I just wanted to confirm your 3% growth forecast for Japan. Which period are we talking about? Is that calendar year or fiscal year?

Mr. Köhler: Calendar year for 2004.

Mr. Hawley: Thank you very much, Mr. Köhler. Thank you very much, ladies and gentlemen. It is 12:35, so we will lift the embargo at 12:50. Thank you very much indeed.




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