Transcript of a Press Briefing (Luncheon) on Japan by Anne O. Krueger, First Deputy Managing Director, IMF

January 25, 2002

Transcript of a Press Briefing (Luncheon) on Japan
Anne O. Krueger
First Deputy Managing Director
International Monetary Fund
Friday, January 25, 2002
Tokyo, Japan

MS. KRUEGER: [In progress] — back in Tokyo, Japan. I have been here [inaudible] but this is the first time I've been here in my new official capacity with the Fund. I'm grateful for the opportunity [inaudible] and to hear firsthand the economic policies of the government and the Bank of Japan and to meet with academics and private sector representatives. I've learned a lot from the visit, and it has deepened my perspective on Japan.

In particular, I have come away impressed that the need to accelerate reforms to restore growth is well recognized. This key message was stressed to me by Ministers Shiokawa, Yanagisawa, and Takenaka in the meetings I was privileged to have with them in the course of the last two days.

The ministers clearly stated the government's resolve to intensify the pace of bank and corporate restructuring, implement public sector reforms to anchor fiscal consolidation over the medium term, and increase competition in many sectors of the economy.

Restoring the health of the banking system rightly remains a top priority for the government. Financial Services Minister Yanagisawa told me of the government's determination to deal with the bad loan problem, including through ongoing special bank inspections, and to ensure the stability of the financial sector in the transition to partial deposit insurance.

As you know, Japan is participating in the Fund's Financial Sector Assessment Program, or, as we call it, FSAP. The FSAP process is a collaborative effort in which a country's regulatory and supervisory structures are evaluated relative to best practices. The program includes a financial sector stability assessment, but this does not involve inspections of individual financial institutions, which remain firmly in the purview of the domestic bank regulator.

The Fund has already undertaken 36 FSAPs, including several in industrialized countries. Although this issue was not a focus of my visit, I can tell you that the Fund staff has begun to consult with the authorities at the Ministry of Finance, at the FSA and the Bank of Japan on a range of related technical issues such as the coverage and timing of the evaluation work. In this context, we welcome and appreciate the willingness and efforts of the FSA to start substantial evaluation work with regard to the issues covered by the FSA from this summer.

In my meetings with Finance Minister Shiokawa and Vice Minister Kuroda, I expressed the Fund's strong support for the government's determination to achieve significant fiscal consolidation over the medium run. This effort is in the short run being balanced by the need to provide some support for the weak economy. The ministers also expressed their desire to push through additional fiscal reforms, both on the spending and the tax side, that will strengthen the public finances over time.

On monetary policy, I had a very useful meeting with Deputy Governor Yamaguchi. The Bank of Japan clearly has the objective to end deflationary pressures as soon as possible, and in this context, I welcome their recent actions to raise further the policy target for deposits held at the central bank. I came away confident that the Bank of Japan will keep monetary policy flexible so that this objective can be achieved.

In closing, let me say that I am leaving with a strong sense of partnership with the Japanese authorities. Their support for the work of the Fund has been very critical to our operations, both crisis prevention and crisis management. They have also strongly supported our work in the highly indebted countries through their generous contribution to the PRGF fund. I am grateful for their warm hospitality during my visit. Thank you.

I stand ready and open for questions.

MR. SAITO: Please identify yourself.

QUESTION: Hideaki Matsuda, Jiji Press. As you know, Japanese consumer index—consumer price index declined to a 30-year low. Are you concerned with the deflationary pressure in Japan? And if you are concerned with that situation, what is the best prescription for Japan to take? Thank you.

MS. KRUEGER: I think everyone is concerned with the deflation in Japan. It is something of a record since for several years none of other industrial countries have faced it. And in that regard, it looks as if it's part of the problem or, if you like, of the slower growth that has happened in these past few years.

The obvious prescription is to have as easy a money as possible, and I think the Bank of Japan has indicated a great deal of flexibility in this regard and is increasing the monetary base.

In the longer term, of course, getting the structural reforms in place that will provide for more productive investment opportunities will also help. But in the short term, I think reliance has to be largely on as easy money as possible.

QUESTION: I'd like to know about your idea on Japanese yen. The government —and also the U.S. government— seems to support weak yen, and is it really helping the economy?

MS. KRUEGER: I think the Japanese government is quite correctly letting the yen find its own position in the market. This is not the Japanese government policy per se, but it's the outcome of whatever things that the government does that then lead to market—a change in the exchange rate, which quite recently has been for yen depreciation. I think that insofar as it's a market outcome and it reflects some of the underlying factors in the outlook for the Japanese economy at the moment, that's part of the exchange regime, then it doesn't make any sense to talk about a flexible exchange rate unless the rate is flexible.

QUESTION: Ms. Krueger mentioned that it is desirable to see the BOJ remain flexible as far as their monetary policies are concerned. But [inaudible] be more specific on what monetary policy further can be taken by the BOJ, because ever since last year quantitative easing has been done quite significantly already, and it has become evident that that action has not produced any tangible results. So can you be more specific about what additional monetary easing is possible [inaudible]?

MS. KRUEGER: That's right to say [inaudible] you know they have eased a lot, and we don't know whether the situation might not even have been worse if they hadn't. So I think it's not quite fair to say there's been no effect, although obviously we would have liked to—all of us would have liked to have seen more effect.

Clearly, they want to remain flexible. Clearly, they want to announce as quickly as they can a move to trying to ensure that at least the price level will no longer fall. I think they are looking at whatever they can in order to do that. But certainly increasing the monetary base, increasing the liquidity of the economy, is already being done.

QUESTION: Are you regarding the rescue package for Daiei as an indication that the Japanese government is willing to press ahead with corporate balance sheet restructuring and banking cleanup? The market has exactly the opposite view on that.

Secondly, after the East Asia financial crisis, the IMF had been heavily criticized for not sending stronger warning signal that crisis was coming. Are you not making the same mistake about Japan?

MS. KRUEGER: We didn't get in very much—I heard some discussion on the Daiei case. We didn't get into it very much, and indeed I was not here to try and get into the particulars but, rather, to look at overall policy and to learn as much as I could about that. So I can't give you any interpretation on the Daiei.

May I then ask for clarification on your second question? I don't quite understand what you meant about the IMF and crisis [inaudible].

QUESTION: Well, I don't actually recall what happened after the East Asian crisis specifically about Japan. It looks to a lot of observers, Tokyo-based economists, that, for instance, the figures regarding the bad loans are bad — as accurate as the figure the Bank of Thailand provided regarding its foreign reserve before July 2, 1997. If you don't go into individual inspection of banks, what sort of guarantee do you have, for instance, that the figures officially quoted are accurate? The Bank of Japan states, for instance, that the real [inaudible] ratio of the Japanese banks is five or six [inaudible]. The government still claims that it is 10 or 11. There is a complete lack of transparency.

There was, as you know, a long discussion within the IMF whether the IMF could or should raise the yellow card or the brake card because in such case it would trigger the very crisis it is trying to prevent. A lot of people think that Japan is about to suffer a major financial crisis, and if not what sort of evidence can we rely on, the evidence provided by the authorities, since every single bankruptcy in Japan has proved that the books have been cooked, and with the consent of the regulatory authorities.

MS. KRUEGER: Obviously we could have a long discussion here—do you want to translate?


MS. KRUEGER: I think there is a concern here. There's concern in the rest of the world. We have had Article IV consultations with Japan. That is published. I don't think that, at least as far as I know, anybody says that a crisis is coming, so much as people say there's a risk. And there's always a problem with an uncertain future. How will the world economy evolve? How will other things go? What are the facts there?

And certainly I think —I had some discussions with government officials, and there's discussion of, if you like, the worst-case outcome as well as the more central cases. I do not think, based on what I learned, that we're in a situation where anything is imminent so much as there is some risk at one end of the spectrum.

As to the warning, I think there was a warning before, and certainly there was a warning to the government before the Thailand crisis. And I was not at the Fund at the time, and I knew of that warning, so I can give personal attestation to the fact that it was not simply internal. It went beyond that. So I don't think the Fund is quite as—was as silent on the subject as your question implies.

As to the Japanese situation, of course, there is discussion of the banks, and there is a great deal of effort to clean them[non-performing loans] up. The FSAP process here and elsewhere and many other initiatives of the international financial community are designed to get at the fact more quickly to make the situation more transparent so that there will be less argument in the future over what the facts are. I guess that's about all I can say at this stage.

MR. SAITO: I think she can take only a few more questions, perhaps two. Yes, please?

QUESTION: I understand you had discussion with Japanese scholars, besides the Japanese officials, on the Japanese economy. What kind of impression did you have? Were there any differences between what the Japanese government officials say and the Japanese scholars say?

MS. KRUEGER: In fact, [inaudible] surprisingly few. I think the general tone of the discussion with the officials and the academic economists was very much the same. In fact, I am impressed to the degree to which people from various communities see the issues—see the same issues and see them in much the same way.

QUESTION: Can I take the opportunity to ask you to bring us up to date about the state of the Fund's discussions with Argentina, whether you've been encouraged by events of the past few days, and whether you expect to disburse on February 4th a loan to Turkey.

MS. KRUEGER: Argentina—well, on Turkey first, certainly the negotiations [inaudible]. Certainly we expect to bring the papers to the Board very early, I would guess, in February. I am not—I [inaudible] when I left the date had not been set, but it's certainly very much in that range.

As to Argentina, once again I have to say I've been here and focusing on Japan the past few days, so I may not be up with exactly the latest twist. We have had, I think, all week, and maybe even part of last week, a monetary mission there looking at some of the issues in the financial banking system and working with the authorities to try and understand better what's involved there. A mission I think has arrived just today or yesterday on some of the debt restructuring fiscal issues, and I believe a mission leader is also there.

So far there are many discussions, both in Argentina between our teams and the Argentine authorities, and also back and forth with Washington. Those will continue. Minister Remes Lenicov has said—and I think it's been reported by all the wire services—that he expects to be in Washington in about two weeks to begin discussions.

We are anxious to work with them, anxious to be able to support them, and, of course, want to see as rapid an exit from their current difficult situation as is possible. They wish to and they have stated their desire to have a plan ready to present to us with the various pieces in place before we begin any formal negotiations, and I think that's probably right.

So we hope that their planning process will go as quickly as possible, that our people will be able to be of use at the technical level, and that we can get on with the program fairly quickly.

MR. SAITO: We have to stop here, although I know some of them have just arrived. Copies of Ms. Krueger's statement are available when you go out [inaudible] if you wish to pick it up. I would like to thank you all for coming to this press luncheon with Ms. Krueger. Thank you very much.


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