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Statement at the 58th IMF / WB Joint Annual Meeting (Dubai, United Arab Emirates / Sep. 23, 2003)

Statement by the Honorable TOSHIHIKO FUKUI,
 Governor of the Bank for JAPAN,
at the Joint Annual Discussion
 

I  Introduction
 

 

Mr. Chairman and members of the Board of Governors:
 

 

I am very pleased to have this opportunity today to address the2003 World Bank-IMF Annual Meetings as Alternate Governor for Japan. I wouldlike to express my gratitude to the government of the United Arab Emirates andthe authorities of Dubai for hosting this year's Annual Meetings.
 

II  The World Economic Outlook
 

 

World Economy
 
I welcome the positive signs of recovery that are emerging in the worldeconomy, and the resulting improvement in global equity markets. While dueattention should continue to be paid to downside risks, such as a fall in theprices of goods and assets in some regions, I expect the world economy tocontinue to gradually recover in the second half of 2003, supported by policyefforts in many countries.
 
The Asian economy is expected to continue its strong growth thanks to thediminishing adverse impact of SARS as well as receding uncertainties surroundingthe world economy. In order for Asian countries to maintain sustainable growthover the medium and long term, it is important for them to develop regional bondmarkets, with a view to better utilizing the region's high level of savingsfor long-term investments that is necessary for economic development. In thiscontext, the Finance Ministers of ASEAN countries, China, Korea, and Japan (ASEAN+ 3) agreed in August 2003 to intensify their efforts to develop regional bondmarkets.
 
With respect to emerging market economies, I am pleased to note the increasingmarket confidence as a result of appropriate policy management, particularly inBrazil. However, it is essential for these countries to press ahead withstructural reform, including fiscal consolidation, in order to achievesustainable economic development.

I welcome the IMF's approval on September 20th of a new arrangement withArgentina in the context of its medium-term economic program. However, Argentinastill faces many structural problems, which call for far-reaching reforms underthe new IMF-supported program. It is also necessary for the Argentineauthorities to proceed promptly with good-faith negotiations with a large numberof external creditors under the principle of equitable treatment of allcreditors.
    

 

Japanese Economy
 
The Japanese economy is showing signs of recovery: stock prices are keepinga rising trend and there has been an improvement in corporate profits. Accordingto recently released data, Japan's real GDP in the second quarter of 2003 grewby 3.9 percent in annualized terms, supported primarily by well-sustainedprivate consumption and business investment. This was the sixth consecutivequarter of positive growth. In order to achieve sustainable growth, thegovernment will continue to pursue structural reform in an integrated manner insuch areas as regulation, the financial sector, taxation, and governmentexpenditure.
 
With regard to fiscal policy, the government intends to maintain in its FY2004Budget a restrained fiscal stance and to pursue greater prioritization andefficiency in budget allocation, taking into account Japan's difficult fiscalposition. As for medium-term fiscal management, the government's goal is toachieve a primary surplus by the early 2010s through the realization of privatedemand-led sustainable growth and continued efforts to improve the fiscalbalance. The government will also address comprehensive tax reform from amedium-term perspective, with the aim of re-invigorating society as well as theeconomy, and of regaining the confidence of the people.
 
As for the financial sector, under the "Program for Financial Revival"announced in October 2002, the government set a target of halving by end-March2005 the major banks' nonperforming loan (NPL) ratio as of end-March 2002.Financial statements of major banks as of end-March 2003 show that progress inlowering ratio is well on track. The government has also taken rigorous measuresto improve the quality of financial institutions' capital, including the boldand prompt injection of public funds into an institution whose capital adequacyratio had fallen below the minimum regulatory requirement in order to pre-emptany financial crises. The Industrial Revitalization Corporation of Japan (IRCJ),which was established in April 2003 for the purpose of revitalizing Japan'scorporate sector, is set to purchase financial institutions' loans topotentially viable firms. Recently, the IRCJ selected a few companies as thefirst batch of candidates to receive assistance.

The Bank of Japan (BoJ) has been providing ample liquidity to the markets underthe policy framework of quantitative easing in order to help stabilize financialmarkets and to put an end to deflation expeditiously. Furthermore, the BoJ inJuly 2003 introduced a scheme whereby asset-backed securities would be purchasedas part of an effort to strengthen the transmission mechanism of monetaryeasing. The BoJ is firmly committed to maintaining its current policy stanceuntil the consumer price index stably registers zero percent or above. Thegovernment, together with the BoJ, will make continued efforts to maintain thestability of the financial and capital markets as well as to overcome deflation.
 

III  Strengthening of the International FinancialSystem

 

Despite the IMF's efforts in the area of crisis prevention,financial crises have occured in a number of countries in recent years,highlighting the need to further strengthen the measures for crisis preventionand resolution.
  

 

Crisis Prevention
 
In the area of crisis prevention, an important issue to be addressed is thestrengthening of the IMF's surveillance together with the implementation ofsound policies by each country to reduce external vulnerability. I welcome theprogress being made by the IMF on various fronts, including the refinements ofthe framework for debt sustainability analysis, and hope further steps will betaken toward strengthening surveillance. The Financial Sector Assessment Program(FSAP) is well under way, with many member countries having already completedthe assessments.

The Contingent Credit Line (CCL), which was set up as a facility for crisisprevention, is due to expire at the end of November 2003. However, the need foran effective framework to prevent contagion remains unchanged. I hope that theIMF's Board of Directors will discuss and come up with effective measures forcrisis prevention before the CCL expires.
 
Crisis Resolution
 

For crisis resolution, it is essential to promptly restore the debtsustainability of a country in crisis through an appropriate combination ofpolicy adjustment, official lending from the IMF and other internationalfinancial institutions, and private sector involvement (PSI), including debtrestructuring as necessary.

With regard to PSI, I welcome the introduction of collective action clauses(CACs) by a number of emerging market economies, including Brazil, South Africa,and Korea, following Mexico's lead. I also welcome the Uruguayangovernment's successful debt exchange using CACs in the Japanese market. Ihope that other countries will follow suit in introducing effective CACs intheir sovereign bond issues under foreign jurisdiction. With regard to a Code ofConduct for crisis resolution, I hope that interested parties will make furtherprogress in the discussion of its various elements.

On the IMF's quota, it is essential that the IMF maintain a sufficient levelof financial resources for effective crisis resolution. Changes in the worldeconomy and financial markets can be abrupt and hard to predict. The IMF shouldtherefore continue to examine quota issues and be prepared to act promptlywhenever the need for a general quota increase arises. In the review of quotas,we should bear in mind that the distribution of quotas should reflect thecurrent realities of the world economy as well as the relative position ofmember countries' economies.
 

IV  Development Issues
 

 

Now, I would like to address development issues. Economic growthis certainly an essential factor to achieve sustainable poverty reduction. Inthis context, I welcome the fact that the developing countries have demonstratedgrowth that outpaces the world economy on the whole.
 
Recent developments leading to the achievement of the Millennium DevelopmentGoals (MDGs)
 
It is important for the international community to cooperate closely in aimingto achieve the Millennium Development Goals (MDGs). To move toward the goalssteadily, each developing country is expected to localize the MDGs according tothe circumstance it faces and then to formulate its own Poverty ReductionStrategy Paper (PRSP) designed to achieve the localized goals. As developingcountries vary on many fronts, such as poverty profile, fiscal situation, andadministrative capacity, it is essential for each developing country to localizethe MDGs by identifying the development strategy it needs and prioritizingpolicies to implement it under that strategy. In this context, Japan welcomes asteady increase in the number of countries that have completed the PRSP process.
 
Looking at recent PRSPs, one can observe that more and more PRSPs are puttingemphasis on growth-oriented policies, with the recognition that growth isessential for poverty reduction. Particularly, we welcome the fact that theWorld Bank has recently affirmed its commitment to infrastructure dimension. Inthis context, I would like to request the Bank to analyze the transmissionmechanism among infrastructure, economic growth and poverty reduction. The Bankwould then feed back the results of such an analysis to its future operations. Iwould also like to request the Bank further collaborate with the private sectorin order to make more sustainable operations in areas related to infrastructure,taking account of lessons learned from the past experiences.
 
As the PRSP process moved up along its phases from formulation toimplementation, several issues have emerged. For example, many PRSPs simply listdiverse policies without prioritizing them. Some other PRSPs seem to set tooambitious goals. To address these issues, it is necessary to firmly cost outeach policy in the PRSPs and incorporate them into the annual budget and theMedium-Term Expenditures Framework (MTEF), while at the same time keep the wholespectrum within the framework of macro-economic balance and public debtsustainability. Developing countries are required to build their capacity insuch areas as fiscal and public expenditure management and the World Bank isexpected to strengthen support to help such efforts. Once a realistic PRSP hasbeen formulated, the donor community including the IMF and the World Bank isexpected to jointly support the PRSP by aligning its assistance with the PRSP.

To enhance the effectiveness of PRSP approach in the future, it is essentialto monitor how developing countries and the donor community are playing theroles they have committed to, and to feed back its results to future PRSPs. Whenconducting evaluations, it is necessary to distinguish the evaluation ofpolicies from that of the results. Japan welcomes the fact that policyevaluation now holds a central place in the internationally agreed monitoringframework.
 
Assistance to Policy and Human Resource Development
 
To enhance aid effectiveness, both the developing countries and theinternational community as a whole should make their own endeavors. While theformer is requested to establish a prudent institutional capacity and policyenvironment, the latter should extend assistance to developing countries in thisrespect. Japan is committed to continuously making active contributions in suchareas as consolidation of institutional capacity and policy environment, andcapacity building of the public sector. I have the pleasure to announce herethat Japan is currently preparing for the establishment of a Global DistanceLearning (GDL) Center in Tokyo. To be connected with the other GDL centers inthe Asia Pacific Region via satellite, the new facility should be able toprovide such interactive services as remote training and policy dialogues. Japanwill continue working with the World Bank to inaugurate the Center in the springof next year.

Reconstruction Assistance to Iraq, Afghanistan, and Sri Lanka
 
IRegarding countries suffering from conflicts, it is essential to promote humansecurity as well as to extend assistance in development dimension such asconsolidating peace and building basic foundations.

Stability and reconstruction of Iraq is important. As a member of theinternational community, Japan pledged a total of USD 100 million inhumanitarian assistance, and to date has already extended or decided to extendsome USD 86 million of assistance. One of the key challenges that lie ahead isto make the October international donors conference in Madrid a success. Japanis also committed to make efforts in this direction. The situation inAfghanistan also deserves the attention of the international community. In thissense, it was high time that the Afghanistan Development Forum was held here inDubai. As host to the International Conference on Reconstruction Assistance toAfghanistan in January 2002, Japan will continue to be actively engaged insupporting Afghanistan through the "DDR process" (the process ofdisarmament, demobilization and reintegration of the former combatants),"Ogata Initiative" (a comprehensive development plan for priority regions inAfghanistan), and assistance to reconstruct roads. Consolidating peace in SriLanka is also essential. For its part, Japan hosted the Tokyo Conference onReconstruction and Development of Sri Lanka this past June. At the Conference,Japan expressed its intention to extend assistance of up to USD 1 billion forthe coming three years, subject to the evolution of the peace process in thecountry.
 
The 3rd Tokyo International Conference on African Development (TICAD III)
 
Japan has been promoting the TICAD process since 1993. As such, its assistanceto African countries has been articulated based upon the spirit of the process,which is to enhance both Africa's ownership and partnership of theinternational community. This spirit, is echoed in the "New Partnership forAfrica's Development" (NEPAD). I have the pleasure to note that the thirdmeeting of TICAD will be held in Tokyo next week, at the juncture of the 10thyear since the process was inaugurated. I hope that an active discussion willtake place to further consolidate and enlarge the partnership of theinternational community towards NEPAD.
 
ODA Charter
 
Next, I would like to inform you that the Japanese Government has recentlyrevised its "ODA Charter". In the new Charter, strengthening partnershipsand collaborating with international organizations are placed as one of the keyprinciples, and poverty reduction is held up as one of the priority goals. Japanintends to continue supporting the PRSPs based upon the principles set out inthe Charter. Furthermore, the new Charter stipulates that Japan will enhancepolicy dialogues with developing countries, paying due attention to theirinstitutional environment and policy capacity, while also reflecting the resultsof ex-post assessments of development assistance to future ODA policy. We hopethat these attempts will lead to further enhancement of aid effectiveness.

There is no change in the importance given to the comparability of developmentand environmental dimensions in the new ODA Charter. In this respect, the JapanBank for International Cooperation (JBIC) will put into place its newEnvironmental Guidelines effective this October. The new Guidelines willintroduce, among others, a procedure allowing the complainant to place formalobjections. Japan International Cooperation Agency (JICA), for its part, iscurrently working to revise its guidelines for environmental and socialsafeguards before the end of this fiscal year. I strongly hope that manycountries will follow their lead in order to achieve more sustainabledevelopment of the international community, especially in developing countries.
 

V  Measures Against the Financing of Terrorism
 

 

The threat of terrorism remains serious. It is thereforeimportant for the international community to strengthen measures to combat thefinancing of terrorism. From this standpoint, I welcome the revision of the 40recommendations of the Financial Action Task Force (FATF). The revisedrecommendations have set a new international standard in the fight against moneylaundering and terrorist financing. I also welcome the substantial progress inthe assessments of member countries' compliance with the AML/CFT (anti-moneylaundering and combating the financing of terrorism) standard in the context ofa 12-month pilot program by the IMF and the World Bank.

Based on the results of these assessments, technical assistance should beprovided to help countries implement the AML/CFT measures. Japan will continueto contribute to such assistance based on the needs of recipient countries.
 

VI  Conclusion
 

 

More than six years have passed since the outbreak of the Asianfinancial crisis. I welcome the progress that the World Bank and the IMF havemade towards improving various aspects of their work. In spite of such efforts,however, countries in different regions have experienced economic crises. Iwould therefore like to conclude my remarks by expressing my sincere hope thatthe World Bank and the IMF will further strengthen their efforts toward crisisprevention and resolution.