Vice Minister Kuroda's Statement on the Reform of the International Financial Architecture

Since the last Manila Framework Meeting, Asian countries haveaccelerated their recovery from the currency and financial crisis of 1997-98,and have solidified their return to the path of sustainable growth. With theirhighly trained human capital and ample savings, Asian countries have a highpotential for growth. However, it is precisely at such a time that we ought notto slacken our efforts to reform the international financial system.

Reform of the IMF

Reform of the IMF is expected to be one of the main topics in aseries of meetings this spring. The IMF is the organization at the center of theworld financial system, and its reform is absolutely necessary if it is toexercise the great authority needed to prevent and resolve the types of crisisthat will mark the 21^st century.

Japan has already offered a number of suggestions, including 1)paying greater attention to large-scale and abrupt capital movements whenconducting IMF surveillance and formulating its programs, 2) limiting the IMF'sinvolvement in structural policies to those policies that are directly linked tosolving crises, and 3) enhancing the IMF's transparency and improving itsdecision making procedures. I would like to express my appreciation for theprogress which has been made in many of these areas so far.

As has been emphasized recently, the role of private capitalmarkets in meeting the funding needs of developing countries and emergingeconomies has increased in importance. Hence it is vital to review the functionof the IMF basically in the direction of promoting or catalyzing access toprivate financial markets. However, we still need an international safety net inorder to respond effectively whenever a currency crisis occurs. From thisstandpoint, it is clear that the IMF will have to maintain or even strengthenits function as a kind of international "lender of last resort" in certaincases such as a crisis caused by temporary liquidity shortage. It is ourresponsibility to secure the financial resources needed for that purpose.

In addition, we should keep in our mind that the IMF wasoriginally founded to perform the functions like those of "credit cooperative,"supporting efforts of member countries that have fallen into balance of paymentsproblems, even if they do not have a currency crisis, as these countries makeefforts to strengthen fiscal and financial policies and implement neededstructural reform. True, we need to avoid the moral hazard of chronic dependenceon IMF resources.

However, the function of supporting member countries on thebasis of appropriate policies will continue to be important, and this functionprovides an environment for the IMF to carry out its role as lender of lastresort effectively during financial crises.

In this connection, we would like to emphasize that although itmay be necessary to streamline IMF's facilities in order to improve functions ofthe IMF in a manner better fitted to its present role, how to use and operateIMF's facilities should remain critical questions as well. The discussions on awide range of areas are under way in the IMF's Board including a review of theIMF's facilities, the strengthening of safeguards of Fund's resources, theimprovement of programs and surveillance, and increased transparency ofprocedures. We hope that these interrelated issues will be examined carefullyand dealt with in a coherent manner.

I would like to take this opportunity to point out theimportance of reassessing the current distribution of quotas as part of thereform of the IMF. Japan recently nominated former Vice Finance MinisterSakakibara as a candidate for the post of Managing Director. Our nomination ofhim reflected our position that, in order to become a truly global organization,the IMF should select its leaders based on a candidate's ability to lead the IMFin the right direction, and not on his or her country of origin. Although wewithdrew our nomination of Mr. Sakakibara last week with a view to contributingto forming an international consensus about a new Managing Director, FinanceMinister Miyazawa clearly stated on that occasion that a reassessment of thequota distribution to reflect the changes in the global economy is urgentlyneeded. Over half a century has passed since the founding of the IMF. Despitethe fact that many Asian countries have emerged as important economic powers,the voting share and Board representation of the Asian countries have beenextremely limited. On the other hand, 37% of the voting power in the IMF belongsto Executive Directors from Europe, eight of the twenty-four Executive Directorsare from Europe, and seven of these eight represent a single economic union. Webelieve that the member countries of the IMF urgently need to consider theredistribution of quotas.

Promoting International Codes andStandards

The IMF is an organization that handles basically macroeconomicissues. However, it has become important functions of the IMF to strengthenmember countries' financial sectors, promote policy implementation in conformitywith international codes and standards, and increase transparency, including thepublication of data.

On the other hand, the major international codes and standardsare set by BIS, IOSCO, IAIS, and many other standard-setting bodies as well. Anappropriate arrangement for unified monitoring and assessment is needed. Fromthis standpoint, we think it important that the IMF will not only implement andassess the codes developed by the IMF itself concerning fiscal and financialsectors and data dissemination, but will take a modular approach, assuming acentral role in coordinating the monitoring and assessment of internationalcodes and standards set by other international organizations. One idea toproceed with this approach would be to set up a new coordination unit within theIMF so that it carries out this work expeditiously and efficiently with closecooperation with the World Bank as well as other standard-setting bodies.

If human resources or funds for implementing international codesand standards are insufficient in emerging economies and developing countries,the IMF and the World Bank should take the lead in actively providing technicalassistance. In such cases, they will need to provide carefully targetedassistance not only for the monitoring and assessment of those codes andstandards but also for capacity building for implementing them. Theinternational community ought to tackle this issue, keeping in mind that thecosts at this kind of technical assistance are far less than the damage theinternational community would suffer if a crisis were to occur.

In order for internationally agreed preventive measures to beeffective against a crisis, it is essential for each country to firmly implementits own specific measures based on ownership. It goes without saying that eventhough the IMF plays a major role as an overall coordinative body in promotinginternational codes and standards, in the end it is the responsibility of theauthorities in each country to implement them.

Response to Hedge Funds, etc.

Issues being worked at the Financial Stability Forum alsodeserve our serious attention. In particular, its Working Group on HighlyLeveraged Institutions (HLIs) such as hedge funds has examined problems relatedto HLIs from various perspectives: 1) enhancing the risk management ofcounterparty financial institutions, 2) improving the oversight of theauthorities responsible for supervising these institutions, 3) various methodsfor improving the HLIs' own disclosure, and 4) the possibility of directregulations, such as position regulations. In addition, the Working Group'sMarket Dynamics Study Group has conducted a survey of the activities of hedgefunds and especially their effect on emerging economies.

Based on these studies, we believe that it is important tocontinue to keep a close watch on behavior of internationally active investorsincluding HLIs and to examine appropriate measures as necessary. While emergingeconomies need to strengthen their financial systems, such open economies thatare sufficiently large to permit the operation of speculators, but are smallenough to be easily influenced by them, would naturally look for measures toprotect themselves and to maintain market integrity. For example, we considerthat it should be justified for these economies to directly require large-scaleinstitutions' such as HLIs' report on their activities in the market inquestion, and in some cases resort to non-standard policies, as in the cases ofMalaysia and Hong Kong, where there is a suspicion that these institutions havemanipulated market transactions.

I would like to emphasize that the recommendations set out inthe FSF's report on HLIs which will be finalized this weekend need to be fullycarried out together with the recommendations in the FSF's other two reports oncapital flows and offshore financial centers.

Conclusions

The efforts of the international community to strengthen theinternational financial system have great significance. The stability recentlyseen in the international financial markets rests largely on those efforts.However, as innovations in information technology, liberalization ofinternational financial transactions, and globalization proceed, it will beimpossible to completely eliminate the risk of crises arising from large-scaleand abrupt capital movements. We must continue to intensify our efforts toprevent crises and find expeditious and appropriate measures for resolving themwhen they do occur, through the reform of the global financial system as well asthe enhancement of regional financial cooperation such as the Manila Framework.