Statement by the Hon. Kiichi Miyazawa
Minister of Finance of Japan
at the Fifty-Third Joint Annual Discussion
on October 6, 1998
(Delivered by the Hon. Sadakazu Tanigaki, State Secretary ofFinance)
Introduction
Mr. Chairman, fellow Governors, distinguished guests, ladies andgentlemen:
May I begin by saying what a pleasure it is for me to address the 53rdAnnual Meetings of the World Bank Group and the International Monetary Fund.
Before moving to my remarks on policy, I would like to extend a warmwelcome to the Republic of Palau, which has joined both the Fund and the Bank since lastyear's meeting.
State of the World Economy and Policy Coordination
Mr. Chairman:
Let me begin by reviewing the state of the global economy.
Today the world economy is faced with major risks and challenges. In Asia,a region that has experienced a period of great pain since last year, convincing signs ofrecovery are yet to appear.
In the meantime, another currency crisis started to unfold in Russia thispast summer, triggering turbulence in the foreign exchange and financial marketselsewhere, such as the Latin-American economies.
The economic turmoil in emerging as well as transition economies sincelast year has indeed demonstrated the risk of a serious deflationary spiral of the entireworld economy.
At home, the steep downturn of the Japanese economy became obvious lastfall. Despite steady implementation of the latest economic policy package, the largestever, and other measures, our economic situation is still extremely severe.
Considering this and also the current state of the world economy, thegovernment of Japan is fully aware that it is imperative to put its economy on the path ofrecovery and steady growth. Our government will continue to make appropriate policyresponses, including the implementation of a range of new measures put forth by the newadministration.
With regard to foreign exchange, we are of the view that the excessivelyundervalued yen will do no good, not only to the Japanese economy but to the world economyas a whole. Let me make it clear that the government of Japan will not accept theexcessively undervalued yen.
Aiming at the Rebirth of the International Financial System
Reviewing the IMF-World Bank system
For a little more than a year, Mr. Chairman, it has been at the top of ouragenda to stabilize the markets in emerging economies that are exposed to dramatic capitalmovements on an international scale. As the core institutions for addressing such anissue, the International Monetary Fund and the World Bank Group have undoubtedly played avital part in these global efforts.
However, with continued market turbulence in many parts of the world, therole and function of the two institutions which together have long served as one of thelinchpins for the postwar world economy need to be re-examined.
The world today is vastly different from what its leaders, who gathered atBretton Woods in 1944, anticipated. The whole idea of free trade and foreign exchangetransaction under the fixed exchange rate regime was indeed instrumental in postwarrestoration and progress of the world economy. What confronts us today, however, is adifferent reality. A reality in which markets can fall prey to large-scale capitalmovements that are abrupt and flowing across national boundaries.
Expanding the public-sector investments in developing countries bymobilizing public funds, which is one of our missions, has been dwarfed in the wake of theunstable yet increasingly large volume of private capital flows and continued poverty.
Over half a century after the historic conference at Bretton Woods, we allmust recognize that the world economy has a totally new landscape. Thus, I believe it istime we returned to basics and reviewed the purpose of the Fund and the Bank, and it istime for the rebirth of the international financial system.
Abrupt capital movements on a large scale
Before reviewing what the Fund should be, however, I must point this out.I believe that economic management and development strategy that makes the most use of themarket mechanism, which has long been promoted by the Fund, is still essentially valid.Ensuring greater exposure to a market mechanism, thus increasing economic efficiency, willcontinue to be a major policy priority for many of the developing and transitioneconomies. As the basis of a market system, they must improve regulatory and accountingsystems, maintain sound financial systems, and strengthen supervision of financialinstitutions for appropriate risk control.
However, given the fact that the latest turmoil in the monetary andfinancial markets in the emerging economies since last year is due in large part to theabrupt flows of short-term funds, we need to consider how to respond to the short-term orthe speculative movements of capital.
Ever since December 1994, when the Mexican crisis began, we have beenkeenly aware of the risks associated with the modern market economy, where instant,large-scale capital movement can take place. That is why the Fund has initiated its effortto improve transparency to help markets make rational judgments, and has strengthenedsurveillance with the aim of helping prevent crises.
While such an effort is of course needed, it is far from sufficient. Nomatter how transparency is improved, and no matter how surveillance is strengthened,crises can still occur. To address the challenge, the Fund must face up to the realitythat there are cases where the benefits of short-term capital movements can be surpassedby their risk and cost. I believe the Fund should then make further efforts in four areas.
First, as has often been pointed out lately, capital accountliberalization must be implemented with appropriate sequencing. Liberalization of directinvestment and long-term capital flows, for example, must precede liberalization ofshort-term capital flows. What must also come first as a precondition is to have a soundand developed financial sector, responsible fiscal and monetary policies, and adequatedepth of the national economy.
Second, monitoring of international movements of capital must bestrengthened at both ends-creditors and debtors. Particularly with large-scale,international institutional investors, such as hedge funds, we should perhaps considerrequiring them, based on international coordination, to provide information on theirinvestment behavior.
Third, in capital recipient countries, it is essential that theauthorities fully recognize that their corporate as well as financial sectors are facedwith risks that accompany foreign capital inflows, such as foreign exchange risk and therisk associated with maturity mismatch. To this end, the government in each recipientcountry must also enforce a prudential rule when and where it is needed.
Finally, we need to consider some effective measures to protect theemerging economies, which are faced with excessive inflows of short-term capital andcapital flight, from the turmoil resulting from such abrupt capital movements.
Among the so-called capital controls, there are some that might lead tohampering useful capital inflows, such as direct investment, by eroding investorconfidence. Some are either so discretionary or arbitrary that they might undermine theefficiency of the national economy. So, while taking all this into account, I request thatthe Fund make further study on what sort of measures should be taken.
Reconsideration of the Fund-supported adjustment programs
Economic adjustment programs, the core of the IMF system, also require athorough review.
IMF-supported adjustment programs have played a significant role inpromoting appropriate macroeconomic policies and structural reforms in each country, whileunderpinning the country's effort with financial assistance. But, we must not forget thatthe international environment in which the Fund operates has changed dramatically. Whilelimited capital movements and fixed exchange rates were the norm when the institution wasconceived, they are now giving way to free capital movements and flexible exchange rates.
For the Fund to better adapt to the new environment and make its programseven more significant, further improvement must be made on several accounts.
First, on a macroeconomic policy level, there are cases where the Fund'straditional prescription that combines fiscal balance improvements with tightening ofmonetary policy is not appropriate. I say this because in many cases nowadays a currencycrisis or international payments difficulties does not stem from current account deficits,which used to be the cause initially anticipated in the Bretton Woods system: it derivesfrom a change in confidence and the resulting rapid deterioration in capital accounts.
Asking a country with a fiscal surplus to tighten further, or asking acountry to take a high interest rate policy for the sake of exchange rate protection,could end up with more negatives than positives-inviting a downturn in the economy, andfurther eroding confidence.
The second point is related to exchange rate regimes. As we have witnessedin recent events, maintenance of fixed exchange rates, on the one hand, can be taken as agovernment guarantee against exchange rate risk, thus leading to excessive inflows ofshort-term capital. On the other hand, a hasty shift to floating exchange rate regimesfollowing the eruption of a crisis may only invite a free fall of the exchange rates. Withthese lessons in mind, a further effort must be made to identify appropriate exchangepolicies to be incorporated in IMF-supported programs.
Third, capital account flows must not be liberalized too quickly withoutfully taking into account the circumstances of each country. Recognizing that there can bea case that requires some measure to protect a country when the country is faced withabrupt capital movements, the Fund should think together with the local authorities as tohow they might avoid taking unilateral measures which will undermine investor confidence,how they might avoid putting an unnecessary burden on the national economy, and how theymight incorporate such measures into the IMF-supported adjustment programs.
Fourth, the way in which structural reform is being dealt with in IMFprograms deserves further consideration, even if the reform itself is necessary. Takebanking reform. When, for example, a country is not equipped with preconditions for reformsuch as a deposit insurance system, the Fund should perhaps be more considerate of thetiming of implementation and its social impact. Likewise, the Fund should recognize thatthe modality of the market economy can be diverse, reflecting the history and culture ofeach country as well as its stage of economic development.
In this context, the Fund should perhaps reflect on the design of the pastIMF-supported programs. The IMF may have damaged its own credibility when it demandedrather hastily program conditionality on structural measures that were neither necessarynor appropriate in the program design.
Finally, as we have witnessed in a recent series of crises in Asia inparticular, the private sector now plays a central role on both the creditor's and thedebtor's side. Hence, we must make even more sure that support from the public sector,such as the IMF, not be used as a bailout of the private sector.
From the viewpoint of preventing such a moral hazard, the Fund shouldconsider the involvement of the private creditors in formulating an IMF-supported program,for example, by maintaining their exposure to that program country.
The new mission of the World Bank
Now to the World Bank. Traditionally, its mission has been to providedeveloping countries that could not readily raise funds in the market, with the long-termcapital necessary for their economic development.
However, as the flow of private capital from industrial countries to anumber of Asian and Latin-American countries expanded in the 1990s, the focus of the WorldBank operations also shifted from development assistance through infrastructure provisionto other areas, such as education, insurance, population, and the environment.
The economic turmoil triggered by the Asian currency crisis last year hasmade it all the more difficult for us to help developing countries achieve economic growthand to reduce poverty. For the countries in East Asia, this meant a major turnaround. Forthe twenty years that preceded the crisis, these countries enjoyed high and steadyeconomic growth, accomplished fairer distribution of wealth, and succeeded in reducingpoverty. Now, their economic performance has started plummeting, the unemployment rate haskept climbing, prices have risen, and public spending has dropped. All this means aserious impact on the people, particularly those in poverty.
Take Indonesia, where the poverty rate had dropped to 11 percent of thetotal population, or 22.5 million in number, by 1996. The economic crisis has affected thelives of people, first in urban areas and then in rural areas. As a result, the number ofpeople who live in poverty now is said to be 3.5 times as many as two years ago.
Against such a backdrop, reformulating the Bank's mission and the way itprovides assistance is now one of the most urgent tasks.
In the event of a crisis driven by abrupt and large-scale capitalmovements, it should be a significant mission of the Bank, I believe, to work with theFund to stabilize the market through prompt supply of funds, as it did for Korea late lastyear.
In such a case, close collaboration with the Fund is of course essential.But, since the World Bank Group is equipped with functions of its own to raise funds fromthe market and to guarantee private capital mobilization, I request that the Bank considera new scheme of assistance that will capitalize on these functions.
Furthermore, to address a range of new problems associated with a crisis,the Bank must promote social stability and the fight against poverty by implementingappropriate structural programs.
For that, it is essential for the Bank to collaborate with the Fund indealing with structural problems in the financial and corporate sectors. Alongside this,it is even more essential for the Bank to secure basic social spending, for example, oneducation and hygiene, and to protect the most vulnerable group in society, thuscontributing to social stability.
The social investment project which the Bank has recently approved forThailand is an exemplary case, and Japan stands ready to support such an effort by theBank in various ways.
In dealing with poverty and other emerging social problems, the role ofthe International Development Association (IDA) is extremely important. I would like tomake a strong request that IDA address these issues in the Asian region in a prompt andproactive manner, and reflect it in its Twelfth Replenishment.
Even when we ourselves are in the midst of a crisis, we must not forgetour support for countries in great distress, such as the heavily indebted poor countriesand the post-conflict countries. For its part, Japan will continue to support such effortsof the World Bank and other international financial institutions.
Role of the Fund and the Bank and the responsibility of the internationalcommunity
For the international economic community faced with mounting problems andchallenges, the roles of the IMF and its sister institution, the World Bank, areabsolutely vital, and can never be replaced by others. Thus, to make further improvementsin their functions is, I believe, the responsibility of the international community as awhole.
While I welcome the reform effort of these institutions to strengthentheir coordination and to increase transparency, a fundamental review of the IMF-WorldBank system, including the points I have made earlier, is necessary in order to breathenew life into the international financial system.
I would also like to take this opportunity to emphasize that astrengthened financial footing of the Fund is indispensable for it to continue to providecountries in difficulties with appropriate financial assistance and to be able to performits role as the core institution of the international financial system.
Thus, I would like to urge those countries that have yet to notify theirconsent to the ratification of the New Arrangements to Borrow (NAB) as well as the quotaincrease under the Eleventh General Review, to act promptly on these issues.
A New Scheme to Support the Asian Currency Crisis and Internationalizationof the Yen
Announcement of the new scheme
Mr. Chairman:
May I draw your attention to our response to the Asian currency crisisthat started to unfold in Thailand in July of last year.
To address the problem under the international framework of the IMF, theWorld Bank, the Asian Development Bank, and the countries concerned, Japan has committedto the largest bilateral support, and has steadily implemented it. As a result, exchangerates are more or less stabilized in these countries, and one might say that many of them,if not all, have gone through the immediate impact of the crisis. Turning to realeconomies, however, these countries are still faced with difficulties: corporateperformance that is dramatically deteriorating, an unemployment rate that keeps climbing,and prices that continue to increase.
Yet, the Asian strengths are still there. Even the latest currency crisishas failed to shatter their strong fundamentals, such as high savings rates, abundanthuman resources, priority in education, or their firm commitment to economic development.So, once they have overcome the difficulties that now exist, I believe the Asian countrieswill be back on the road again to the further growth and well-being of the people
We all must help these countries overcome economic difficulties and, indoing so, contribute to the stability of the international financial and capital markets.
In this context, I would like to present a new scheme of financialassistance totaling some 30 billion US dollars to be provided as Japan's bilateralsupport. Under the scheme, as I will detail in a minute, 15 billion US dollars will beprovided as mid- to long-term financial assistance for the recovery of the real economy ofthese Asian countries; another 15 billion US dollars will be reserved as provision againstshort-term capital needs that might emerge in the course of promoting economic reform.
Mid- to long-term financial assistance for Asian countries
For the Asian countries affected by the currency crisis, capital needs areenormous. They need capital for corporate debt restructuring in the private sector. Theyneed capital to make their financial systems stable. They need capital for the sociallyvulnerable. They need capital for a stimulus package. They need capital to address acredit crunch.
In response to such mid- and long-term capital needs, Japan will provideassistance to facilitate fund-raising by these Asian countries. At the same time, we willsee to it that the Tokyo market is put to better use and that the reflux of our capital ispromoted.
Specifically, the first thing we plan to do is to provide the Asiancountries with assistance in the form of EXIM Bank loans and yen credit.
Guarantee functions must then be fully drawn upon in order to facilitatefund-raising by the Asian countries in international financial and capital markets. Forthat, the guarantee functions of our Export-Import Bank will be utilized. I request, atthe same time, that the World Bank and the Asian Development Bank provide aggressiveguarantees for the Asian countries' borrowing as well as fund-raising through bond issue.It is hoped that in the long run the establishment of an international guaranteeinstitution with a prime focus on Asian countries will be seriously considered.
Japan will also establish an Asian currency crisis support facility. Byproviding an interest subsidy, for example, the facility will allow borrowers to raisefunds at a smaller cost. This facility will feature a framework which is open to the othercountries in Asia, so should any country agree with this cause, and wish to take part,that would be most welcome.
Further, in collaboration with the World Bank and the Asian DevelopmentBank, Japan will endeavor to provide financial assistance for these Asian countries. Inresponse to the capital needs, in particular, for corporate debt restructuring in theprivate sector and for stabilizing financial systems, I request that the World Bank andthe Asian Development Bank provide the maximum possible assistance. In that event, Japanwill join their effort by providing cofinancing.
Finally, on technical assistance. To help the Asian countries implementcomprehensive measures for corporate debt restructuring in the private sector and forstabilizing financial institutions, I request that the World Bank and the AsianDevelopment Bank provide the needed technical assistance by fully drawing upon the JapanSpecial Fund at each institution.
For its part, Japan stands ready to provide technical assistance,according to the circumstances of each country.
Short-term financial assistance for Asian countries
Should a need arise for short-term capital in the Asian countries tofacilitate trade financing during the process of steady implementation of economic reform,Japan will have short-term capital ready for the need. This will include a method ofincreasing the recipient country's foreign exchange reserve by using swap transactions.
Collaboration with multilateral development banks and other countries
To implement all these measures, Japan intends to collaborate closely withmultilateral development banks and other countries, particularly the countries in theAsia- Pacific region.
Internationalization of the yen
As has been often pointed out, overdependence on the US dollar wasobviously one of the causes of the currency crisis that erupted in Asia last year, andthis has led many countries in the region to look to the yen to play a greater role.
Recognizing this, the government of Japan is now considering from abroader perspective some specific measures to improve the environment for the yen to beused more actively by market participants in the region and beyond.
Three months from now the euro will be introduced. A greater role for theJapanese yen, as an international currency together with the US dollar and the euro,should contribute to the stability of the international monetary system.
Conclusion
Mr. Chairman:
Faced with major risks and challenges, the world economy is now at aturning point. It is about time we made a new step forward to build a new system inresponse to the new reality, while fully drawing upon the wisdom the internationalfinancial community has accumulated over the years.
Like my fellow Governors, I will play my part in aiming at the rebirth ofthe Bretton Woods institutions.
In my statement, I made it clear that Japan is determined to make furthercontributions to its neighbors.
In the future, too, Japan will continue to join hands with all thecountries that are represented here today, and in particular with the Fund and the Bank,to find our way out of the difficulties that lie ahead, and to regain growth momentum forthe world economy.
Thank you.