2001 Spring Meetings
Statement by H.E. Masajuro Shiokawa, Minister of Finance of
Japan at the Third Meeting of the International Monetary and Financial Committee
April 29, 2001
I. World Economic Outlook
1. World Economy
The world economy, which enjoyed vigorous growth until several months ago, is now
slowing down faster than expected. Policy efforts by each country will be even more important to
prevent the slowdown from becoming more serious and leading to a deeper recession.
Interrelations among markets are increasing. As evidenced by the effect of the volatile movement
of U.S. high-tech stocks throughout the world, future developments in the U.S. economy may
decide prospects for the world economy. Appropriate policy measures by the U.S. authorities are
therefore doubly important.
Compared to the last few months of 2000, the slowdown of the U.S. economy has moderated
somewhat. However, the economic prospects remain uncertain. Any decline following an
extended period of asset price increases can have a substantial impact on the economy and there is
a possibility that the slowdown may continue for some time. Since the U.S. authorities still have
plenty of room for maneuver in setting policy measures in the event the economic weakness
continues, an appropriate policy response is necessary.
In the euro area, while the economy as a whole is still expanding, I am concerned that there
are signs the economy is being influenced by the slowdown in the world economy. The
authorities are expected to keep a close watch on developments in prices and business and to take
timely monetary measures if necessary. In addition, I believe the authorities will need to deal
boldly with structural reforms in areas such as the labor market and pension systems.
In recent years the crisis-hit Asian countries have enjoyed a rapid recovery and have
significantly lessened their vulnerability by reducing their short-tem external debt and increasing
their foreign reserves. However, since the latter half of last year their stock and exchange markets
have softened and growth has decelerated noticeably as a result of the worsening world economic
environment. In order to strengthen the confidence of domestic and foreign investors and to
establish a sustained recovery of business investment, it is important to continue the structural
reform, including of the financial and corporative sectors.
2. The Japanese Economy
After growing 1.7 percent in 2000, the Japanese economy has recently been showing signs of
weakening. Although there has been a move toward self-sustained recovery in the corporate
sector, industrial production is decreasing and private consumption remains generally flat.
Regarding fiscal policy, we are doing our best to put the economy on a self-sustained recovery
track through smooth and steady implementation of the FY2001 budget. Concerning monetary
policy, the Bank of Japan (BOJ) took the bold step of adopting a new monetary policy framework
that includes a quantitative target for its monetary operations. The BOJ has expressed its strong
commitment to maintain this new policy, which in practice has the effect of a zero interest rate
policy, until the continuous price decline ends. We have also adopted the Emergency Economic
Package, which tackles in an integrated manner such structural reforms as the resolution of the
problems of non-performing loans of banks and excessive corporate debt, as well as establishing a
limit on shareholdings by banks and, as a temporary measure, the Banks' Shareholding Acquisition
II. Strengthening the International Financial Architecture
The IMF is performing a leading role in promoting the stability of the international financial
system. But for the IMF to be a truly universal institution that represents the entire world, it is
crucial for it to be transparent and accountable to its members as well as to the public, and to
improve its own governance. In this context, we welcome the selection of the Director of the
independent Evaluation Office (EVO) and hope the EVO will successfully carry out its expected
mission. We also welcome the fact that a joint report was submitted to the Committee on the
review of the process for selection of the Managing Director/President by the Fund Working
Group to Review the Process for Selection of the Managing Director and the Bank Working
Group to Review the Process for Selection of the President.
1. Review of conditionality in IMF-supported programs
Conditionality in IMF-supported programs is as significant as surveillance under Article IV
consultations to the relationship between the IMF and its members.
Conditionality is the linkage of the IMF's financial support to a member's economic program.
No one would deny that conditionality is necessary for the IMF's financial support. It ensures the
implementation of policy measures envisaged under a member's economic program in addition to
safeguarding the IMF's resources. However, the scope and details of conditionality have
sometimes been criticized for going too far and for being beyond a member's capacity to
Japan believes that it is crucial to streamline conditionality in light of the need to strengthen
program ownership by member countries. In this context, since the IMF's mandate is to promote
macroeconomic stability, conditionality should be limited to areas that have a significant
macroeconomic impact. Also, when deciding conditionality, due consideration should be given to
each member's actual situation and different circumstances.
Japan welcomes the leadership of the Managing Director in addressing this issue. I expect
that the discussion at the Executive Board on streamlining conditionality will result in a revision
of the IMF's guidelines on conditionality. I also hope that the whole staff will share a common
understanding of the problems that led up to the guidelines' revision and will actually change its
approach to conditionality.
2. Review of Quotas
During the past decades, we have seen substantial changes in the international economy,
including the rapid development and economic success of emerging market economies, especially
in Asia. Japan has repeatedly argued that a review of the allocation of quota shares, voting
powers, and representation on the Executive Board to more appropriately reflect such changes is
unavoidable both to improve the IMF's relationship with its members and to enhance the IMF's
effectiveness and governance.
In light of the proposal made by the Quota Formula Review Group last summer, the
Executive Board is expected to meet to follow up on this issue before the next meeting of this
Committee. I strongly urge the Executive Board to hold such a meeting as soon as possible. I
also request IMF management to make a concrete proposal at that meeting on the selective
adjustment of quotas for members whose quotas are out of line with their position in the world
More fundamentally, since the establishment of the IMF in 1946, the increase in the total
amount of quotas is dwarfed by the increase in trade and capital flows among member countries.
As a result, the amount of IMF resources that a member country can mobilize based on its quota
is limited. Recent events in Argentina and Turkey show how important it is for members' quotas
to be in line with their economic power so that sufficient financial support will be provided by the
IMF when a crisis hits members. This underlines the importance of a general quota increase.
It has been three years since the Eleventh General Review of Quotas was resolved. We have
less than two years to meet the deadline of the Twelfth General Review, which is set for January
2003. Considering that the Committee of the Whole for the Eleventh General Review was
established three years before the deadline, we should immediately establish a Committee of the
Whole to consider the Twelfth General Review.
Japan looks forward to strong leadership from the Managing Director toward resolving this
critical issue which is related to the legitimacy of the IMF.
3. Measures to prevent and resolve financial crises, and reduce vulnerability to financial
(1) Implementation of the internationally agreed Codes and Standards
It is gratifying that the international community has become more aware of the importance of
implementing internationally agreed codes and standards to help prevent financial crises and
reduce countries' vulnerability to crises. In order to promote the implementation of codes and
standards, it is essential that the IMF take a leading role in assessing the implementation status of
member countries. I hope that the IMF will further strengthen its work in this area through the
Reports on the Observance of Standards and Codes (ROSCs) as well as the Financial Sector
Assessment Programs (FSAPs).
I also welcome that the IMF recognized the 40 recommendations made by the Financial
Action Task Force (FATF) as the appropriate international standard for anti-money laundering
with a view to preventing abuse of the international financial system. I expect the IMF, in close
cooperation with relevant international organizations, to enhance its efforts in this area.
It is particularly important to implement the internationally recognized twelve key codes and
standards, including the FATF 40 recommendations. In order to implement these codes and
standards, country ownership should be secured, and it should be affirmed that it is up to member
countries to prioritize standards according to their stage of economic development and
institutional capacity. We should also recognize the importance of providing appropriate
incentives to encourage these efforts and sufficient technical assistance by the international
community, especially the IMF.
Given the limited resources of the IMF and other international organizations, however, it is
critical to prioritize the assessment of the observance of codes and standards as well as the
provision of technical assistance. For the time being, priority should be given to emerging market
economies undertaking various reforms, as this will help promote stability in the international
monetary and financial system.
In this context, I welcome the submission to the Committee of the Guidelines for Public Debt
Management. The Guidelines will help member countries share the same basic principles in
conducting policies for public debt management. However, the actual operation of the principles
should be determined by member countries according to their specific situation.
(2) Ensuring private sector involvement (PSI)
During the recent crises in Argentina and Turkey, the private sector made a contribution
toward meeting the financing requirements of these countries. The importance of private sector
involvement (PSI) in the prevention and resolution of financial crises is now widely recognized.
The successful restructuring of international sovereign bonds in Ecuador and other countries is
another remarkable development. However, I believe there are some practical issues that remain
to be addressed in implementing PSI. These include comparability of treatment between private
sector creditors and official bilateral creditors, as well as the possible use of standstills by debtor
countries to ensure effective PSI. I strongly hope the Board will make progress on this issue.
Effective communication with market players and the private sector in general is essential in
order to improve the IMF's approach to PSI. I hope the new International Capital Markets
Department will contribute to this process.
(3) Capital account liberalization
Although unrestricted capital movements can be a driving force for growth of the world
economy through the efficient distribution of resources, if capital accounts are liberalized too
hastily in the absence of macroeconomic stability and a solid domestic financial system, there are
risks that it could increase an economy's vulnerability. For this reason, it is essential for each
country to sequence capital liberalization according to its particular circumstances. Such a view
has come to be widely shared, particularly since the Asian currency crisis.
Although there is no single prescription for sequencing appropriate for all, countries wishing
to undertake capital account liberalization can draw useful lessons from the experiences of
countries that have already liberalized their capital account. Case studies of countries' experiences
with capital account liberalization are therefore helpful. Moreover, as interdependence among
national economies deepens, the international community has a legitimate interest in the success of
each country's efforts at capital account liberalization. I expect the IMF, in cooperation with
other relevant international bodies such as the World Bank, will continue to accumulate valuable
knowledge and expertise on capital account liberalization.
As a country opens up its economy to international capital flows, the risks associated with
abrupt short-term capital flows can increase. As more countries begin to liberalize their capital
accounts, measures such as comprehensive monitoring of short-term capital flows as well as an
enhanced disclosure policy for highly leveraged institutions to mitigate the risks will become more
important. We also believe that it is justified to maintain market-friendly controls on capital
inflows to restrain abrupt short-term capital inflows. Controls on capital outflows, too, although
they are no substitute for sound macroeconomic policies, can be justified as an exceptional
measure under certain circumstances.
(4) Selection of an appropriate exchange rate regime
No one exchange rate regime is suitable for all countries. What is appropriate will vary
according to a country's particular circumstances, including trade structure and the maturity of its
financial and capital markets. It is important to recognize that exchange rate stability is crucial if
economic entities in small open economies are to engage in stable economic activity. We should
not underestimate how vital stable currencies are for these countries.
An extreme version of the so-called two-corner solution holds that only a perfect free-floating
regime or a hard-peg regime such as a currency board arrangement are sustainable. In my view,
this is inappropriate since it overlooks the fact that a hard-peg regime has some of the same
disadvantages as softer fixed exchange rate regimes. We can, however, support a moderate
version of the two-corner solution, which holds that a crawling-peg regime with a wide band and
a managed floating regime varieties of a free-floating regime, and that each country should be
given a certain amount of discretion in selecting an exchange rate regime, taking into account its
own institutional system and circumstances.
The two-corner solution should be recognized as explaining the hollowing out in recent years
of the middle of the distribution of exchange rate regimes. I do not believe it should be the norm
for the selection of a desirable exchange rate regime.
In sum, in determining which exchange rate regime is most appropriate, a country should look
at a broad range of options along the spectrum between a free-floating regime and a hard-peg
regime, taking into consideration the advantages and disadvantages of each regime for its own
circumstances. It should not look to the two-corner solution to provide the absolute truth.
Moreover, no exchange rate regime is sustainable unless it is underpinned by appropriate
(5) Promoting regional financial arrangements
In order to promote the stability of the international monetary and financial system, it is
important to enhance regional financial cooperation to supplement the functions of the IMF.
In East Asia, there are ongoing efforts among the ASEAN countries and Japan, China, and
the Republic of Korea (ASEAN+3) under the Chiang Mai Initiative agreed in May of last year to
prevent the recurrence of events like the Asian currency crisis and to quickly address such
situations if they should occur. At present, Japan is proceeding with bilateral negotiations on
swap arrangements, based on the main principles agreed among ASEAN+3. It is expected that
the progress on negotiations on bilateral swap arrangements will be reported at the ASEAN + 3
Finance Ministers' Meeting in Honolulu next month.
We expect these regional efforts to contribute to the stability of currency and financial
markets, supplementing the multinational framework of the IMF.