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Statement by Japan, at the 8th IMFC (Dubai, United Arab Emirates / Sep. 21, 2003)

Japanese

Statementby the Honorable Toshihiko Fukui
Governor of the Bank of Japan
and Alternate Governor of the IMF for Japan
At the Eighth Meeting of the International Monetary and Financial Committee
Dubai, United Arab Emirates, September 21,2003

 
I  The Global Economy andFinancial Markets

1. The 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 theincreasing market confidence as a result of appropriate policy management,particularly in Brazil. However, it is essential for these countries to pressahead with structural reform, including fiscal consolidation, in order toachieve sustainable economic development.

I welcome the IMF's approval yesterday of a new arrangement with Argentinain the context of its medium-term economic program. However, Argentina stillfaces many structural problems, which call for far-reaching reforms under thenew IMF-supported program. It is also necessary for the Argentine authorities toproceed promptly with good-faith negotiations with a large number of externalcreditors under the principle of equitable treatment of all creditors.

2. The Japanese Economy

The Japanese economy is showing signs of recovery: stock prices are keeping arising 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 itsFY2004 Budget a restrained fiscal stance and to pursue greater prioritizationand efficiency in budget allocation, taking into account Japan's difficultfiscal position. As for medium-term fiscal management, the government's goalis to achieve a primary surplus by the early 2010s through the realization ofprivate demand-led sustainable growth and continued efforts to improve thefiscal balance. 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 marketsunder the policy framework of quantitative easing in order to help stabilizefinancial markets and to put an end to deflation expeditiously. Furthermore, theBoJ in July 2003 introduced a scheme whereby asset-backed securities would bepurchased as part of an effort to strengthen the transmission mechanism ofmonetary easing. The BoJ is firmly committed to maintaining its current policystance until the consumer price index stably registers zero percent or above.The government, together with the BoJ, will make continued efforts to maintainthe stability of the financial and capital markets as well as to overcomedeflation.

 

 
II  Strengthening IMFSurveillance and Promoting International Financial Stability

Despite the IMF's efforts in the area of crisis prevention, financialcrises have occurred in a number of countries in recent years, highlighting theneed to further strengthen the measures for crisis prevention and resolution.

1. 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 the deepening ofvulnerability assessments. I hope further steps will be taken towardstrengthening surveillance in the context of next year's biennial review ofthe IMF's surveillance. The Financial Sector Assessment Program (FSAP) is wellunder way, with many member countries having already completed the assessments.I hope that many more countries will participate in this program with a view topreventing future crises.

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 promote sound policies and to prevent contagionremains unchanged. I hope that the IMF's Board of Directors will discuss andcome up with effective measures for crisis prevention before the CCL expires.

2. 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, andKorea, following Mexico's lead. I also welcome the Uruguayan government'ssuccessful debt exchange using CACs in the Japanese market. I hope that othercountries will follow suit in introducing effective CACs in their sovereign bondissues under foreign jurisdiction.

With regard to a Code of Conduct for crisis resolution, it is important tosecure widespread agreement among various related parties, including debtorcountries and private sector creditors, and to secure voluntary compliance,since the Code will be a set of general principles with no legally bindingeffect. In order to ensure the effectiveness of the Code, I hope that interestedparties will make further progress in the discussion of its various elements,including the role of the IMF.

I also hope that work will continue on issues of general relevance to theorderly resolution of financial crises, such as aggregation of debt, which wereraised in the discussion of the statutory approach to crisis resolution.

3.  IMF Quotas and Governance

On the IMF's quota, it is essential that the IMF maintain a sufficientlevel of financial resources for effective crisis resolution. Changes in theworld economy and financial markets can be abrupt and hard to predict. The IMFshould therefore continue to examine quota issues and be prepared to actpromptly whenever the need for a general quota increase arises. In the review ofquotas, we should bear in mind that the distribution of quotas should reflectthe current realities of the world economy as well as the relative position ofmember countries' economies.

 

 
III  Accelerating PovertyReduction and Strengthening Sustainable Economic Growth in Low-Income Countries

I believe that the IMF should play a significant role in economic developmentand poverty reduction in low-income countries, both of which are importantobjectives of the international community. In this context, the IMF needs toplay a leading role in helping its members formulate sound macroeconomicpolicies and in analyzing the sources of their economic vulnerabilities, areaswhere the IMF has expertise. At the same time, it is also important for the IMFto contribute to the growth of low-income countries through efficient andeffective collaboration with the World Bank and other international financialinstitutions that have expertise in such areas as fostering private sectordevelopment and other structural issues, which are also essential for the growthof low-income countries.

 

 
IV  Combating MoneyLaundering and the Financing of Terrorism

The threat of terrorism remains serious. It is therefore important for theinternational community to strengthen measures to combat the financing ofterrorism. 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.