Transcript of a Teleconference Call on Japan's 2007 Article IV Consultation Public Information Notice, Staff Report, and Selected Issues paper with Daniel Citrin, Deputy Director in the Asia and Pacific Department and Mission Chief for Japan; and Alessandro Zanello, Division Chief in the Asia and Pacific Department, IMF

August 6, 2007

With Daniel Citrin, Deputy Director in the Asia and Pacific Department and Mission Chief for Japan; and
Alessandro Zanello, Division Chief in the Asia and Pacific Department, IMF
Washington, DC, August 6, 2007

MS. KAMATA: Thank you very much for joining, and good afternoon. I am Yoshiko Kamata of the IMF's External Relations Department. I would like to welcome you all to the conference call on the release of the Article IV Consultation documents on Japan. The documents, as you know, were posted around 2:00 p.m. today on the Media Briefing Center, and I hope you already had a chance to look at them. I would also like to remind you gently that the contents of this conference call and the documents are embargoed until 5:00 p.m. today Washington time, which is 2100 GMT.

Here I am joined by Mr. Daniel Citrin, Deputy Director and Mission Chief for Japan in the Asia and Pacific Department of the IMF, and also Mr. Alessandro Zanello, Division Chief in the Asia and Pacific Department.

So may we take any question, please.

QUESTIONER: I looked over the embargoed statement on Japan based on the consultations and I just had a question about the economic growth prediction. It may be in there and I apologize if it is, but I am not sure if those numbers are revised upward or downward from a preliminary assessment.

MR. CITRIN: They were revised upwards following in comparison to the April WEO projection which didn't reflect the first quarter outturn which was stronger than expected. So our latest projections now show growth of 2.6 percent for 2007, moderating to a bit over 2 next year.

QUESTIONER: Can you remind me what the April projection was?

Mr Citrin: I think the April projection was slightly lower, 2.4 or something like that. I can find it for you somewhere. I don't have it in front of me, but they were revised upward slightly because the first quarter outturn was very strong. GDP grew at a pace that was much stronger than anticipated and so basically this reflects the carryover effects of the strong first quarter outturn. We didn't really change our view in terms of the prospective pace of growth in Japan which we felt would be slightly above 2, moderating to potential growth of just under 2 over the course of the next couple years.

MS. KAMATA: Next question, please.

QUESTIONER: I just wanted to ask about inflation. I am not sure again whether there was a change from your April forecast. And given that the Japanese economy is growing at a reasonable pace, why do we think inflation is going to be completely flat in 2007? And does this mean that you would not be recommending any interest rate rises for some time to come?

MR. CITRIN: Inflation has been marginally negative over the last several months. To a certain extent, it reflects temporary factors, the administrative adjustments in telecommunications prices also. There was a surge—surge is not the right word to describe it, but there was an uptick last year that was related to the surge in oil prices and then oil prices have been flat since then and declined slightly for a while. Part of it is temporary, but clearly the persistent weak inflation numbers in the face of good growth and from everyone's reasonable judgment of the economy operating at full capacity both in labor markets and elsewhere is a puzzle. There are a number of factors that we highlight in our report. We have a box in the staff paper that looks at this issue and there are a number of factors behind the low inflation not only in prices but also in wages that we point to, aggressive cost containment by firms, replacement of retiring high wage workers with younger low paid ones, for a while there was pervasive hiring of workers under nonregular contacts, and all of this has kept wage costs and ultimately prices under control. Japan also has a long history of low inflation which has kept inflation expectations very low. Global competitive pressures are at play. The fact that prices are still falling slightly is a bit of a puzzle, but there are a number of factors that are keeping inflation down.

With regard to the implications for monetary policy, we have stated clearly that we feel that the increase interest rates should be a gradual process in Japan based on a careful reading of incoming data. On the precise timing, that is for the Bank of Japan to judge best, but I think that in our view, markets are pricing in or had been until recently, I haven't looked at the last couple of days, 325 basis point increases over the next year, and that may be an appropriate pace of adjustment and gradual enough, but I guess the precise timing should be based on a careful reading of incoming data.

MS. KAMATA: Next question, please.

QUESTIONER: I'd like to take you back to the PIN and the reference, this intriguing reference to the yen carry trade complicating policy for other countries. I wonder if you could amplify a little bit on that.

MR. CITRIN: I think that the implication of low interest rates in Japan which are, we believe, appropriate from the viewpoint of sustaining the Japanese recovery which is good not only for Japan but for the rest of the world. The implication of that is the yen has tended to be weaker than what most economists would judge to be appropriate from the viewpoint of sort of long term fundamentals.

In that sense, a weaker yen has put competitive pressures on certain countries and at the same time the portfolio-related outflows from Japan have led to in-flows and stronger currencies in certain emerging markets that feature in carry trades and has complicated perhaps matters in recipient countries. I think that is what we are referring to.

QUESTIONER: So the debate was really about whether Japan should be cognizant of the impact that this is having on global imbalances, but the decision of the Executive Directors, after thinking about it, was they should just focus on their domestic things and let the other thing sort itself out.

MR. CITRIN: Well, I think that the spillovers to the rest of the world are an important consideration. But I think on balance in the end the Directors, and if you read the staff report, we considered this issue very carefully and at some length, and the Directors agreed with us that while the yen is weaker and as a consequence monetary conditions are weaker in Japan than they otherwise would be and that this is also having certain spillover effects on other countries, in the end, guiding interstate policy in Japan on the basis of overall considerations, overall judgment on how best to sustain the recovery in Japan was, in the view of Directors, the most appropriate way to go.


MS. KAMATA: Any other questions?

QUESTIONER: Yes, thank you so much. The public information notice mentioned that deeper structural reforms in Japan are needed to improve Japan's growth potential and competitiveness.

My question is the Japanese ruling party, LDP, badly lost the last national election last month and our cabinet is on the brink. So are you worried that the structural reforms might be set back or delayed in Japan?

MR. CITRIN: I am not a political analyst, and I don't want to comment on the outcome of the elections or possible implications. Obviously, to the extent that there's some perhaps political uncertainties that need to get resolved, it could take some time for the prospective policy stance of the government to be sorted out and could effect, could lead to the need for various types of compromises. I'm not sure exactly how things will work themselves out.

I mean all I can say is that we very much hope that there will be a public consensus on the need for reform to ensure sort of maximum long term health of the Japanese economy, and we very much hope that the political uncertainties will not lead to any sort of undue delay in the reform effort.

MS. KAMATA: Next question, is there any?

QUESTIONER: Yes. I wonder if you could perhaps elucidate how Bank of Japan could improve communication with the market with regards anchoring the inflation expectations.

MR. CITRIN: I think the Bank of Japan actually has been doing a pretty good job in the frequency of reports and the number and the data that is put out. We have, I think, an analysis comparing practices in Japan with the rest of the world, with other major central banks, and I think the BOJ comes out pretty favorably in general.

I think two things that we would suggest. First of all, in describing its price understanding which, as you know, at present the understanding of price stability ranges from 0 to 2 percent. I think it would be helpful if, to the extent possible, there could be as much emphasis or perhaps even I should say more emphasis on the fact that most policy board members believe that a 1 percent inflation rate is consistent with price stability. So that's one specific suggestion that we have, that they emphasis this median rather than the 0 to 2 percent range.

Secondly, I think in its various publications, I think it would be helpful if the Bank of Japan were to include a forward-looking assessment of the main risks in the outlook, and this would, I think, help market participants try and get a better feel for the thinking of the central bank.

MS. KAMATA: Thank you. If we don't have any more questions, maybe we can wrap up this session. Thank you very much for joining in this conference call. Let me remind you again that this conference call and the documents are all embargoed until 5:00 p.m. today, Washington time, 2100 GMT.

Thank you very much and have a nice day.


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