Transcript of the IMF Press Conference on the Article IV Consultation Mission to JapanWith John Lipsky, Acting Managing Director, IMF
Anoop Singh, Director of the Asia and Pacific Department
Mahmood Pradhan, Senior Advisor of the Asia and Pacific Department (APD), and Mission Chief for Japan
Ken Kang, Division Chief, APD
Shogo Ishii, Director, Regional Office for Asia and the Pacific
June 8, 2011, Tokyo
Mr. Ishii: Good afternoon everybody. Thank you for coming to the IMF press conference on the conclusion of the 2011 Article IV consultation mission. I’m Shogo Ishii, Director of the IMF Regional Office for Asia and the Pacific. Let me introduce Mr. John Lipsky, Acting Managing Director. On his right is Mr. Anoop Singh, Director of the Asia and Pacific Department. On Mr. Lipsky’s left is Mr. Mahmood Pradhan, Senior Advisor of the Asia and Pacific Department, and he is also the Mission Chief of the Article IV consultation. Further on the left is Mr. Ken Kang, Division Chief in charge of Japan. Mr. Lipsky will give short opening remarks and take questions from the floor. There is no embargo for the content of the press conference, the concluding statement, and the press release. Mr. Lipsky, please.
Mr. Lipsky: Thank you very much and good afternoon everyone. It’s a pleasure to be here with you today.
First of all I would like to begin by expressing my deepest condolences on my behalf and that of my colleagues to the people of Japan for the tragic loss of life inflicted by the earthquake and tsunami. The Japanese people have shown tremendous resilience in dealing with this terrible tragedy and in tackling the formidable challenges of reconstruction.
I would like to begin my remarks today with reference to the just concluded annual Article IV consultation discussions that we have held with the Japanese authorities. Over the past ten days, the IMF team has met with senior officials from the Japanese government, the Bank of Japan, and private sector representatives. The goal has been to examine the economic and financial outlook and to discuss the key policy challenges facing the Japanese authorities and the Japanese economy, and broadly the Japanese people. As always, our discussions have been collegial, frank, and very enlightening, and we sincerely thank our counterparts for their hospitality and their cooperation.
As part of our work during this visit, we have also looked carefully at how economic developments and policies in Japan affect other countries. This innovative “spillover” analysis as we call it, that we are carrying out for the first time with the world’s five largest economies, comprising Japan, the United States, the euro area, China, and the United Kingdom, is a new tool that we at the IMF have introduced to enhance the policy dialogue among our members in the wake of the global financial crisis. In carrying out the spillover analysis, the goal is to assess the systemic implications of economic and financial policies in each of these economies. We are doing so by consulting with the authorities in a range of affected partner economies about the policy spillovers and then studying the channels through which such policies are transmitted, such as trade, capital flows, financial exposures, and confidence effects. The results are then being discussed by the five systemic economies in the context of our regular annual consultations. By shedding light on the impact of one country or one region’s policies on others, our spillover analysis is designed both to increase the awareness of these links, and facilitate the process of finding policies that serve both the national and the global interest, through an enhanced multi-lateral dialogue.
The key finding of our consultation discussions regarding Japan included the following points:
First, as we all know, Japans’ economy continues to suffer from the earthquake, but should begin to recover strongly during the second half of the year. The initial shock of the disaster was severe, but swift and decisive action by the Japanese authorities and cooperation with the Japanese people helped to limit its economic impact. Activity is expected to bounce back over the summer, as supply constraints ease, and reconstruction spending begins to accelerate. Moreover, the bounce back in growth is going to continue next year. On this basis, we expect GDP growth to rise from -0.7 percent this year, to 2.9 percent in calendar year 2012. The earthquake’s effects have hit other countries as shortages of many high-tech inputs from Japan slowed overseas production. Fortunately, these disruptions are expected to be short-lived.
The policy response to the earthquake has been focused appropriately on relief and reconstruction efforts. At the same time, it is widely recognized that an ambitious medium-term strategy will be required to bring down public debt, in order to maintain confidence in the longer-term sustainability of public finances. Given the limited scope for cutting expenditures, the fiscal adjustment strategy should rely primarily on comprehensive tax reforms. In particular, we have discussed the advisability of a moderate increase in the consumption tax, starting next year, when cyclical recovery is going to be underway. A failure to bring about the needed fiscal adjustment will no doubt undermine Japan’s growth prospects, if it resulted in a sharp rise in government bond yields.
In fact, this particular concern has been communicated by other countries participating in the spillover exercise, reflecting their worries about the possible negative effects of a failure by Japan to successfully address its long-term fiscal challenges. In other words, Japan’s partners look to Japan to take effective action to preserve long-term fiscal sustainability.
Turning to monetary policy, the Bank of Japan’s swift and timely response to the earthquake has helped maintain confidence and financial stability. Looking ahead, additional easing measures could help further support the recovery and ward off any deflationary pressures.
Financial sector policies should protect the financial system, and hence the overall economy, against risks of an economic slowdown and heightened financial market volatility. IMF staff in the coming year will undertake a comprehensive, financial sector assessment program (FSAP). This FSAP update will provide an opportunity to explore the impact of new global financial reforms on Japan’s financial system, as well as to examine issues related to financial stability.
The IMF team represented here also looked at how Japan might boost growth over the longer-term. Further trade liberalization, such as that proposed through the Trans-Pacific Partnership, could open the door to new export markets and promote regulatory reform of services and agriculture. Policies to boost employment are particularly important, focusing on raising labor participation by the young, by women, and by elderly workers. Finally, enhancing financial intermediation and further regional integration would also help raise output in Japan and in its Asian neighbors.
Now, before taking your questions, I am delighted to announce that the 2012 Annual Meetings of the IMF and the World Bank will take place here in Tokyo, in October 2012. These annual meetings, as you probably know, represent the leading global venue to discuss international economics and financial developments, and the policies to strengthen inclusive economic growth. They will draw officials, experts, investors and financial sector representatives to Tokyo, from around the world, and my colleagues and I are highly confident that the commitment and the capacity of the Japanese authorities, and broadly the Japanese people, to execute this complex operation, will ensure the meetings’ success. We are very grateful for the Japanese authority’s invitation.
I would also like to add that, despite the adversity caused by the earthquake, Japan has continued its strong commitment to international cooperation by contributing to the capital replenishment of the International Development Assistance (IDA) of the World Bank Group and the quota increases of the IMF. We are very grateful to the Japanese authorities and people for their generous contributions.
Thanks very much for your attention in these opening remarks. I would be very happy to take your questions.
Mr. Ishii: Please raise your hand if you have any questions. If you raise questions, please identify your name and affiliation.
QUESTION: On page two you refer to the Japanese banking system and say that supervisors should encourage weak banks to improve their capital base and so on. What in particular are you worried about in the Japanese banking system that provokes you to say that?
Mr. Lipsky: Thank you for that detailed question. I’m going to turn to Mr. Pradhan who has looked at this issue.
Mr. Pradhan: On the two parts to your question. On the first about credit risk, it is advice to watch and monitor the increase in credit risk that could stem from the weak economic outlook for the very near-term and the impact on the economy of this disaster. It is a standard concern about credit deterioration in the affected areas, and to the extent that the earthquake and the tsunami have affected the broader economy and enterprises across the economy, it is a concern about just watching those credit risks.
On the second part of your question, Japanese banks’ holdings of equities, this is, if you like, something like a stress test which will be explored in greater detail, as our directing manager mentioned, during the upcoming FSAP, but it is a concern about equities holdings reducing the Tier 1 capital level of banks. Let me emphasize that it is not a concern about any volatility in equity prices that we have seen so far, including the immediate impact of the earthquake. It is more advice to the authorities to monitor what happens to equity prices and hard impacts to banks.
QUESTION: I have a question concerning your recommendation of tax reform. You mentioned a moderate increase in the consumption tax in 2012, when recovery is underway. If this is your forecast of the economy in 2012, 2.9 percent in real terms, I think that is a little bit of an ambitious forecast. If recovery is slower than your expectation, what should the Japanese government do in the taxation areas? That’s the first question. Do you think that your proposal is realistic in the real Japanese political arena? That’s the second question. Thank you.
Mr. Lipsky. First thank you for coming and thank you for question. I will take the second part first. I don’t have any commentary on Japanese politics, I’m sure you are more of an expert than I am. Nonetheless, it strikes me that there is very broad recognition among the Japanese people, as well as among Japanese trading partners and partners in general, that there is a challenge of medium- and long-term fiscal sustainability. It is obviously not possible to imagine that the Japan debt to GDP ration can continue to rise indefinitely into the future. It seems clear that actions will be needed to halt and then also ultimately reverse this trend, and that the fiscal actions needed to produce this will, in the long run, enhance both confidence and credibility, and will boost growth prospects in Japan. Let me make it clear, that our forecast for next year – remember this is calendar year 2012, not fiscal year – that our growth forecast anticipates a rise in the consumption tax. We certainly grant that, in the very near-term, in general, fiscal consolidation will tend to retard growth in the near-term, what our analysis has indicated. As we published in the World Economic Outlook forecast document of a year ago, the record shows that fiscal consolidation, over time, in fact produces stronger growth, just as we anticipate. Right now, we think the base case is very clear. All the elements appear to be falling in place for a solid rebound in the Japanese economy. Failure to take advantage of the opportunity presented by a strong rebound to put in place the first measures of what we all know will be an extended period of need for fiscal adjustment would be a wasted opportunity, and we fear would create worries, not confidence, about the outlook.
QUESTION: I have a follow-up question to this. When you say moderate increase in sales tax, how much are you talking about? Doubling five to ten over time? My second question is what exactly can the Bank of Japan do to further ease credit?
Mr. Pradhan: Thank you. Let me take the Bank of Japan first, and then I’m going to ask my colleague Mr. Kang to talk about what we have in mind in terms of a moderate increase under various circumstances.
As you know the Bank of Japan has played a very, very supportive role during this period. In the following years, it has greatly expanded its securities purchase program and supplied additional liquidity in case there was any market stress, and that has helped stabilize financial markets and maintain stability throughout the broader system, not just wholesale money markets. In terms of what more the Bank of Japan can do, we would urge the Bank of Japan to guard against further risks of deflation in a period of weak activity, and it should stand ready to expand its assets purchase program and further ease monetary conditions in that way if necessary. Let me turn to my colleague Ken and he will talk about the tax issue.
Mr. Kang,: On your question about the moderate increase in the consumption tax, in our view, while other tax measures could be considered, we favor a modest increase in the consumption tax from say five percent to around seven to eight percent, starting next year, to take advantage of the cyclical recovery. It is important to keep in mind that all of this tax revenue will be spent on reconstruction, and therefore its net impact on growth is unclear, but likely to be moderate. Over the medium-term – for us that is over a 10 year period – we would recommend raising the consumption tax very gradually to 15 percent as part of a comprehensive fiscal strategy for bringing down the public debt ratio. Raising the consumption tax from 5 percent, which is one of the lowest rates in the world, to 15 percent, would roughly close about half of the financing gap needed to bring the public debt ratio down by some time around the middle of this decade.
Mr. Lipsky: I might add that, at the same time, it is certainly possible to consider a reduction in the corporate tax, which is one of the highest in the world. What we have in mind is tax reform that would simultaneously enhance the growth prospects of the economy, and at the same time, increase confidence in the sustainability of public finances.
QUESTION: Do you think it is warranted for advanced countries to intervene in the foreign exchange market together like in the case of this March or Japan to intervene in the market single-handedly to prevent the higher yen from deterring Japanese reconstruction and recovery from the disaster? Thank you.
Mr. Lipsky: I don’t have any particular comment on the foreign exchange market and the level of exchange rate with regard to the yen other than to say we don’t see this being a problem for Japanese growth going forward, but I would also make it clear in the case in March that not just Japan, but Japan and its G7 partners, felt that the excessive volatility in markets post the earthquake and tsunami reflected some expectations about actions that were not felt to be justified, or in other words there was a significant volatility in markets that did not seem consistent with underlying fundamentals, and the intervention was undertaken on a joint basis, and it appears to have helped calm markets and stabilize markets subsequently. So I think it’s clear that the G7 at least is willing to take action in the case of market conditions that appear to be disorderly. But in general of course the floating exchange rate regime among the major international currencies has been appropriate and effective and we certainly expect it to be so in the future.
QUESTION: I have two questions, one is the following: BoJ, exclusive of food and energy, should explain about the inflation rate. When looked at in terms of the core inflation rate, are you saying that the Japanese authorities are not tackling the problem sufficiently? And do you think the long-term economic growth rate might be affected by the nuclear power plant disaster – that is of concern to the Japanese.
Mr. Lipsky: I will turn to my colleagues who have looked at these in detail.
Mr. Pradhan: I will take the first question on the BoJ and ask Ken to speak on the second. On the BoJ, let me explain what we are saying in the statement. Many central banks, and the BoJ is not an exception in this sense, look at a variety of measures of inflation. There are periods like at present where some of these measures may diverge significantly, and what we have in mind here is that the impact of commodity prices may be driving headline inflation somewhat higher than other measures of inflation which exclude energy and sometimes the other measure which excludes food as well as energy. The point we are making here is that in this environment where inflation measures are diverging, which may not last for the long term, the BoJ may need to spend a bit more time in communications in terms of explaining the causes of how it sees what is moving some of these, what is behind the divergence. That is point one. And secondly, what type of weight it might assign to different measures of inflation in determining its policy stance. So it’s really just about reinforcing its current communications strategy.
Mr. Kang: On your second question about the constraints posed by the electricity shortages. When we do our forecast we look at various risk factors, including in this case the disruptions to the supply chain as well as the pace at which the capacity for electricity can recover. We are encouraged that there are signs that the supply capacity for electricity has improved along with measures taken by the government to conserve energy use. However, you are right, looking ahead it will be important to expand the capacity for electricity in light of the ongoing difficulties in the nuclear area. And for that reason, in future supplementary budgets we would put priority on spending to fix the damaged infrastructure and to restore the various supply capacities.
QUESTION: Talking of spillover effects, have any of Japan’s partner countries expressed concerns to the IMF about the political stability, or lack of political stability, in Japan? And secondly, if I may, I would like to ask Mr. Lipsky what impact, if any, recent events at the IMF have had on its day-to-day operations, and whether it is your intention still to leave the IMF before the end of this year.
Mr. Lipsky: First let’s talk about spillovers. Our spillover analysis examined the aspects that are relevant to the IMF’s purview. We talked about policies, we talked about economic effects – we don’t talk about politics. I think it’s important to note, let me emphasize again, Japan’s partners were not particularly worried about the Japanese growth outlook. They were not particularly worried about exchange rate volatility. What they were concerned about is the importance of Japan establishing credible medium-term fiscal consolidation policies as an important contribution to international stability.
Let me take advantage of that question to answer one that wasn’t asked, just in case no one was going to ask it. Japan is of course a key member of the G7 and the G8, and one of the key members of the IMF, but also a key member of the G20, and a key participant in the mutual assessment process being carried forward under the G20 framework for strong, sustainable, and balanced growth. And I just want to emphasize the importance of this exercise in general, to take advantage of the very important lesson that we all learned in the wake of the 2008-2009 crisis. And that was that we saw that coherent and consistent policy actions taken together by the G20 played an important role in stopping the downturn and laying the ground for the recovery. Post that crisis, there has been an important agreement among the G20 to preserve this framework of cooperative and coherent policy development in the belief that if policies, and I’m talking about both monetary, fiscal, structural, exchange-rate policies, are all developed in a coherent and cooperative way, that the outcomes will on the one hand be better for everyone, will guard against downturns, and will also tend to reduce imbalances. So it is of interest to see what through our spillover analysis the insights from Japan’s partners about what Japan can do to contribute to global progress.
By the way, when we conducted these reports, we also asked Japanese authorities and others about their suggestions about what their systemic partners can do to help promote economic advance. This is a process that is very actively underway, and is intended to produce at the G20 Summit in Cannes in November an action plan of specific policies that each of the G20 members will implement to help carry forward strengthening of global growth and establishment of more sustainable growth and better balanced growth globally.
Now coming back to your question about the IMF, I can assure you that my 2,400 colleagues on the IMF staff who are an exceptionally talented and exceptionally dedicated group of professionals take very, very seriously the important responsibilities that have been given to us by our 187 member countries, and we are dedicated to carrying out those responsibilities fully and with all our energy and focus, and that is what we are doing. So there is no doubt that we are as fully capable of acting as we are expected to by our member countries, today, tomorrow, and into the future.
QUESTION: And your own intention?
Mr. Lipsky: Right now we have many more important questions to deal with than that.
QUESTION: With regard to the selection of the next MD of the IMF, will you be introducing additional measures for more transparency and more fairness?
Mr. Lipsky: Let me be clear on a couple of important points. Responsibility for the selection of the managing director is entirely that of the IMF’s 187 member countries acting through our 24 chair Executive Board. The Executive Board has established a very clear set of procedures for arriving at that selection, and those procedures have been published and are available to everyone. First, they lay out a process of nomination by the countries. That nomination period closes on June 10. The nomination process in fact is confidential – some have announced their candidacy, but the process is confidential in the sense that on June 10 the candidates, the nominees if you will, will be announced. Then there is a process of shortlisting, if necessary, down to a list of three candidates, and then each of those candidates will be interviewed by the Executive Board representing all 187 member countries, and then the membership will make its selection. The process is intended to be open, transparent, and merit-based, and I assume and am hopeful that open means open, open to all, transparent in the sense that we will see who the candidates are, and it will be very clear, and the selection will be by the membership. I am highly confident that this process will produce a new managing director for the IMF of great talent, great energy, and great effectiveness, and I look forward to greeting the new managing director when he or she is selected.
QUESTION: What is your view on the three candidates for the next IMF chief, and also are you confident that the next IMF chief will be selected by the June 30? And also what is your view on Greece’s debt problems right now?
Mr. Lipsky: Those are very different questions. The whole nomination process is being run by the Executive Board, representing the member countries. The nomination process is confidential, at least until the period closes, and then the list will be made known. So I don’t know who the nominees are. We will find out on June 10. You asked would it be done by June 30. As I say, this is entirely a matter for the membership acting through the Executive Board. They have announced a process with the intention of arriving at a decision by June 30, and I have no reason to doubt that that will be the outcome. With regard to the situation in Greece, let me take one step back and point out something that you all know. Over the past year, three of the so-called peripheral countries in the euro area, Greece, and also Ireland and Portugal, have experienced very serious strains both in terms of economic performance and in financial market pressures. The euro area and the European Union more broadly have reacted by undertaking some very innovative new steps designed to provide support for euro area countries in these kinds of difficulties and they not only created new instruments, such as the European Financial Stability Facility (EFSF), but they also created the so-called “troika” format, joining the European Commission, the European Central Bank, and the International Monetary Fund, to help these countries design economic stabilization and adjustment policies and to provide them financial support in the implementation of these policies intended to produce the conditions that would lead to renewed growth and in fact sustained and rapid growth. The programs have been discussed and approved – Greece, Ireland, and Portugal. The Irish program is on track, and you might notice that there was a change of government between its negotiation and today. That program was supported by both the government of the day and the opposition which is now the government, and the implementation continues on track. And I’m happy to report, among other things, that export growth in Ireland is showing signs of strength. The program in Portugal is a very ambitious program of structural reform and adjustment. You have probably noticed that there was an election over the weekend that resulted in a change of government. Similarly, the outgoing government and the incoming government both had formally supported the program. The new government has already stated its intentions to fully implement that program. With regard to the Greek authorities, who were after all the first to negotiate such an adjustment program, inevitably in a situation in which the strains are very large, there is going to be uncertainty about the process and the outcomes, and naturally you would expect to see midcourse corrections along the way. The Greek authorities started with a very large budget deficit of around 15% of GDP. So far in the program they have adopted adjustment equivalent to about 5% of GDP, but taking account of the difficulties of implementation and the environment, the Greek authorities have been in discussions with the troika to look for a set of policy adjustments that would put the program back on track, and that was agreed and announced last weekend. The Greek authorities have adopted, or are in the process of adopting, a program of ambitious structural adjustment that if implemented we are confident, as are the Greek authorities, would set the stage for a resumption of growth and open up the possibility of sustained and solid growth in the Greek economy. This is not a simple matter. This is going to be one that is going to require courageous decisions, and energetic implementation, but we are very encouraged by the determination and resolve shown by the Greek authorities. We are currently discussing with our partners the financing aspects of this arrangement, and in time it will be presented for approval and support by the European authorities and by the IMF’s Executive Board.
Mr. Ishii: It is now time. We would like to conclude this press conference. Please note that the video of this conference will be posted on the IMF website later today. If you need any help please contact our press officers, Ms. Tomomi Sekioka and Ms. Keiko Utsunomiya. Thank you very much for coming.