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Statement by Japan, at the 1st IMFC (Washington, D.C. / Apr. 16, 2000)

Japanese

 

Statement by H.E. Kiichi Miyazawa, Minister of Finance of Japan
at the First Meeting of the 
International Monetary and Financial Committee

April 16, 2000

 

I. Introduction

Since it was established more than fifty years ago, the International Monetary Fund has played a critical role as the central institution of the international monetary system. As analyzed in the recent issue of the World Economic Outlook (WEO), the international community has overcome a number of crises and achieved remarkable economic development in the second half of the twentieth century. In all these years, by assisting members' adjustment efforts in dealing with balance of payments difficulties and by maintaining the stability of the international financial system, the IMF has significantly contributed to sound global economic development and the welfare of people throughout the world.

Nonetheless, we should not forget that the international community still faces numerous challenges. The fact that many countries, and a large number of people, have been left behind by global economic integration and have been unable to escape from poverty is a strong reminder of those challenges. Public interest in the IMF's activities is increasing. This increased attention will help the IMF to continue to perform its tasks appropriately, and it must make greater efforts to ensure that the public has a proper understanding of its activities.

This meeting is an important first step for the International Monetary and Financial Committee, which was established by the Board of Governors at its Annual Meetings last fall. We expect that this Committee will play an even greater role as an advisory body to the IMF as it addresses the various challenges that lie ahead.

Recently, Mr. Michel Camdessus resigned after making a valuable contribution to the IMF for 13 years as its Managing Director, and Mr. Horst Kohler, President of the European Bank for Reconstruction and Development, was elected to succeed him. We expect that Mr. Kohler will work in close cooperation with member countries and exercise leadership in addressing the important challenges that lie ahead, including reform of theIMF.

II. World Economic Outlook

1. World economy

The world economy has stabilized and is showing higher than expected recovery and growth. This is reflected in the upward revision of the World Economic Outlook's projection for world growth for 2000, from 3.5 percent in the fall of 1999 to 4.2 percent this spring. Potential risks to the world economy still remain, however. To maintain the current good performance of the world economy and to avoid an abrupt correction, it is important that each country continues to pursue appropriate macroeconomic policies and proceeds with necessary structural reforms.

In the United States, the historic economic expansion has continued since the spring of 1991. The strength of the economy is due, at least in part, to increased productivity, owing to buoyant information technology (IT)-related investment. However, there is concern that economic growth may be substantially influenced by an over-optimistic view about the future and the wealth effect of overvalued stock prices. The authorities should maintain prudent and appropriate fiscal and monetary policies. 

In the euro area, the economy has rebounded from its temporary slump and returned to a recovery path. However, there are concerns about the continuing decline of the euro against other major currencies. To strengthen market confidence and achieve sustainable growth over the medium to long term, fiscal consolidation and structural reforms, including of the labor market, should continue to be addressed. 

The crisis-hit Asian countries made a V-shaped recovery last year. Private demand, including consumption and business investment, is recovering, and the economies are expected to return to a path of high potential growth. Thanks to these countries' external surpluses, their external vulnerability has been alleviated and private capital is returning. Under these circumstances, continued efforts toward banking and corporate restructuring would further strengthen external confidence and firmly establish the recovery.

Latin American countries have been showing promising signs of recovery since the second half of 1999. However, large current account deficits, combined with reduced private capital inflows, are anticipated. To restore the confidence of domestic and foreign investors, appropriate macroeconomic policies and further implementation of structural reforms are called for. 

2. Japanese economy

In 1999, Japan's economy showed growth during the first half of the year, followed by a decline in the second half. Since real GDP grew by 0.3 percent, compared with minus 2.5 percent in 1998, the worst phase may be over. 

Economic activity so far this year has been showing mixed signals. The employment situation remains severe. Personal consumption, although recovering from a decline in the fourth quarter of 1999, has not yet regained its strength. At the same time, business investment is increasing, against a backdrop of improved corporate profits and buoyant IT-related investment. The upward trend in stock prices seems to reflect confidence about the economic growth prospects. The government will continue to monitor economic developments carefully and make every effort to implement policies that will support a full-fledged economic recovery led by private demand.

On the financial front, the disposal of bad loans is proceeding and financial deregulation under the so-called Japanese Big Bang initiatives is in its final stage. In these circumstances, the structure of Japan's financial sector is undergoing a drastic change. Mergers and acquisitions are blurring the traditional distinction between banking, securities, and insurance. Foreign financial institutions are increasing their presence by buying out Japanese financial houses. Non-financial companies are expressing their interest in entering the financial sector. These developments in the financial sector are expected to help promote competition in the non-financial sectors and accelerate structural reforms of the overall economy.

3. Impact on the world economy of the information technology revolution

The IT revolution has raised the potential global growth rate by allowing a more efficient use of resources and a rise in productivity, in addition to promoting growth through brisk IT-related investment. Furthermore, the internet has dramatically changed existing business models, while at the same time bringing about new opportunities for value creation. In Japan, eighteen and a half million people, or 15 percent of the population, were internet users at the end of 1999; that number is estimated to reach 30 million by the end of 2002. Electronic commerce is fast expanding, and as mentioned earlier, IT-related investment has started to lead business investment.

Financial sectors in many countries are undergoing substantial change as a result of the IT revolution. Non-financial companies are moving into the financial sector and innovative financial services are being offered through electronic financial transactions. While technological innovation is resulting in efficiency and convenience, these changes in the financial sector present challenges in terms of making transactions secure and protecting consumers, as well as in preserving the stability of the financial system.

The impact of the IT revolution on the macroeconomy and finance is an important issue for the international community, and should be discussed in relevantfora.

III. Strengthening Global Financial Systems in the Twenty-First Century

1. Reform of the IMF

Reform of the IMF is essential in order for it to continue to exercise a central role in ensuring the stability and development of the international financial system and in coping with new international financial challenges in the twenty-first century.

Japan has already offered a number of suggestions on the subject of IMF reform, including: (1) paying greater attention to large-scale and abrupt international capital movements when conducting IMF surveillance and formulating programs; (2) limiting the IMF's involvement in structural policies to those that are directly linked to solving crises; and (3) enhancing the IMF's transparency and improving its decision-making procedures. I would like to express my appreciation for the progress which has been made in many of these areas so far.

(1) Role of the IMF

As has been emphasized recently, the role of private capital markets in meeting the funding needs of developing countries and emerging markets has increased in importance. Hence, it is vital to review the functions of the IMF basically in the direction of promoting or catalyzing access to private financial markets. However, we still need an international safety net in order to be able to respond effectively to currency crises. From this standpoint, it is clear that the IMF will have to maintain, or even strengthen, its function as a kind of international lender of last resort in crises caused by a temporary shortage of liquidity. It is our responsibility to secure the financial resources needed for that purpose.

In addition, we should keep in mind that the IMF was originally founded to perform functions akin to those of "a credit cooperative," supporting the efforts of members with balance of payments problems (even when they do not have a currency crisis) as they make efforts to strengthen their fiscal and financial policies and implement needed structural reforms. While we need to avoid the moral hazard of chronic dependence on IMF resources, the function of supporting members on the basis of appropriate policies will continue to be important and will provide an environment for the IMF to effectively carry out its role as a kind of lender of last resort during a financial crisis.

(2) Review of IMF facilities and other issues

The streamlining of IMF facilities is necessary in order to improve the functions of the IMF and make them better suited to its role in a changing economy. The elimination of unused facilities is a welcome first step.

The review of major facilities has just begun at the IMF Executive Board. I believe that it is important for the IMF to redefine the Stand-By Arrangement (SBA) as its core and basic facility. Since the Extended Fund Facility (EFF) has been effective in supporting countries undertaking reforms that take time before they lead to an improvement in the balance of payments, it should be defined as a supplementary facility to the SBA. The Supplemental Reserve Facility (SRF) should continue to perform its important function of providing large-scale emergency support to countries hit by a currency crisis.

The Contingent Credit Line (CCL) emphasizes crisis prevention. Since it was designed to provide a precautionary line of credit against contagion for countries that have been implementing appropriate economic policies, its eligibility criteria should be sufficiently strict. However, considering there has not been a single case of application of the CCL, I agree that we should look into revising it, including by lowering the rate of charge and eliminating the commitment fees, in order to make it easier to use. At the same time, we should consider more fundamental issues when reviewing the CCL. For instance, for the CCL to be truly effective and appropriate, we need to think further about what kind of countries should be eligible. We also need to pay attention to cases where a country might lose its eligibility for a CCL after it was approved.

The Poverty Reduction and Growth Facility (PRGF) was established to provide the poorest developing countries with assistance on concessional terms. It has played a major role in supporting the macroeconomic stability of the poorest developing countries needed to reduce poverty. Japan has made significant contributions to the Loan Account and Subsidy Account of the PRGF Trust. The PRGF is expected to continue to perform an essential function of supporting the poorest developing countries. The PRGF will become self-sustainable in 2005, as the reserve for the PRGF Trust will reach a level where it can finance the whole PRGF operation. Until then, further resources will be necessary for the PRGF loans, and serious discussions should begin. Given that additional contributions from members are unlikely, we believe it would be appropriate to finance the loan resources for the interim PRGF from the General Resources Account(GRA). 

Discussions on a wide range of issues are under way at the IMF Executive Board, including a review of IMF facilities, the strengthening of safeguards for the IMF's resources, the improvement of programs and surveillance, and increased transparency of procedures. We hope that these interrelated issues will be examined actively and dealt with in a coherent manner. We also support the establishment of an Independent Evaluation Office as an independent, permanent body that will make periodic evaluations of the IMF's activities and provide suggestions for improvements and reforms.

(3) Review of quotas

For the IMF to continue to perform its central role as a truly global institution in the international financial system, it is essential that the allocation of quota shares-which determines the amount of members' contributions and access limits of IMF resources and is the basis for voting power for important decisions, including the election of the Managing Director-reflects the reality of the world economy.

Over half a century has passed since the establishment of the IMF. Despite the fact that many emerging economies, including in Asia, have become important economic powers, their international trade has increased dramatically, and their weight in international financial markets is growing, the allocation of quota shares, voting shares, and Board representation of emerging market economies have been considerably limited. By contrast, even though the introduction of a common currency in Europe has reduced the need for international settlements, European countries have one third of the quota shares and one third of the Executive Directors. A review of quota allocation, voting shares, and number of Executive Directors to more appropriately reflect the economic realities of member countries is an important issue related to the IMF's governance and accountability. I believe that an immediate review and correction are essential.

2. Promotion of International Standards and Codes

In order to help maintain members' economic stability, it is essential to strengthen their microeconomic foundations. Thus, while the IMF is the central macroeconomic institution in the international community, it has also become an important function of the IMF to strengthen members' financial sectors, to promote policy implementation which conforms with international codes and standards, and to help enhance transparency, including the publication of economic data by members. Although the Reports on Observance of Standards and Codes (ROSCs) are still in the pilot study stage, they provide an appropriate framework for assessing the implementation of major international standards and codes. Also, the Financial Sector Assessment Program (FSAP) is becoming an effective means of strengthening financial sectors and assessing and monitoring them. By virtue of its broad membership and the Article IV consultation process, we think it is important for the IMF not only to promote the implementation of standards and codes which fall in its core areas, including transparency of fiscal and financial policies and data dissemination, but to play a leading role in the coordination of standards assessment outside its core areas. One way to do this would be to establish a coordination unit within the IMF to carry out this work in close cooperation with the World Bank, international standards-setting bodies, and national supervisory authorities.

If human resources or funds for implementing international codes and standards are insufficient in emerging economies and developing countries, the IMF and World Bank should take the lead in actively providing technical assistance. They will need to provide carefully targeted assistance, not only for monitoring and assessing the codes and standards, but also for building the capacity to implement them. The international community as a whole must tackle this issue, bearing in mind that the costs of such technical assistance will be far less than the damage the international community would suffer if a crisis were to occur.

3. Private Sector Involvement

After a year of discussion and actual experience on private sector involvement (PSI), we have clearly made concrete steps. Agreement was reached at a recent IMF Executive Board meeting on a general framework regarding the application of measures to involve the private sector in a concerted form to countries facing balance of payments difficulties. The calm response of the international community to the recent restructuring of sovereign bonds by Pakistan and Ukraine and the temporary suspension of debt payments by Ecuador is evidence that market participants are deepening their understanding ofPSI.

The next challenge in promoting PSI is to improve the methods and criteria for judging the sustainability of debt payments, which is one of the deciding factors for the application of concerted PSI. In order to ensure the validity of PSI application and its smooth implementation, it is essential to clarify ex ante under what circumstances and on what data or grounds PSI will be applied in concerted form and to explain why it was applied ex post. For the time being, efforts should be made to examine indicators of debt payments sustainability and to improve the reliability of those indicators through the accumulation of experience with actual implementation.

When implementing PSI, it is essential to create an environment in which debtor countries and creditors cooperate and communicate with each other, and I hope the operations of creditor committees and other measures will be examined to this end.

4. Responses to vulnerability to crisis

Japan has made various proposals about policies that emerging markets need to pursue in order to reduce their vulnerability to crisis: (1) capital account liberalization needs to be carried out in a well-sequenced manner; (2) more detailed data of capital inflows and outflows need to be collected in order to strengthen the monitoring of capital movements; (3) domestic financial systems, including appropriate supervisory and regulatory systems need to be strengthened; (4) appropriate exchange rate regimes must be adopted in accordance with countries' particular situations; and (5) capital controls, though they should not be a substitute for sound macroeconomic and structural policy, may be helpful in certain cases. Many of these proposals are becoming part of an international consensus.

As to issues concerning creditors, Japan has proposed for several years that: (1) disclosure and risk management of market participants, including highly leveraged institutions (HLIs) such as hedge funds, should be strengthened; (2) risk management by the counterparties to hedge funds and supervision by the authorities on those counterparties should be strengthened; and (3) emerging economies should adopt appropriate defensive policies and maintain the integrity of their markets. For example, monitoring by the authorities of emerging economies should be intensified when markets are being influenced by the activities of investors such as hedge funds.

These Japanese proposals are reflected in the final report of the Financial Stability Forum's Working Group on HLIs, and we believe that, first of all, it is important that the recommendations of that report are fully implemented. We also wish to emphasize that the international community should keep a close watch on the conduct of international investors such as HLIs, and that we should continue to explore what measures are needed, including some type of direct controls.

IV. Support to Highly Indebted Poor Countries

We welcome the progress made in the implementation of the enhanced Highly Indebted Poor Country (HIPC) Initiative, enabling five countries to reach their decision points, and Uganda to reach to its completion point. We also appreciate the IMF's cooperation with the World Bank in sending joint missions to member countries to help them prepare Poverty Reduction Strategy Papers (PRSPs). We hope as many countries as possible will soon reach their decision points under the enhanced HIPC Initiative. We believe that it is important for HIPC countries to continue to strengthen their efforts to promote the preparation of PRSPs with the collaboration of the IMF and the Bank in order to ensure steady implementation of the enhanced HIPC initiative.

The IMF has made substantial progress in securing the necessary financing for the PRGF-HIPC Trust through committed contributions of member countries and its own resources. It is essential that the financing be provided soon, so that progress in implementing the initiative will not be hampered. We hope that contributions from member countries and the utilization of the IMF's own resources will proceed smoothly.

Japan is the largest ODA creditor to HIPC countries and has already begun its contributions to the PRGF-HIPC Trust Fund. I am happy to announce that we will extend enhanced debt relief of up to 100 percent of Japan's non-ODA claims and make a total contribution of up to $200 million, including the $10 million already disbursed, to the World Bank's HIPC Trust Fund.