After discussions with Japanese Prime Minister Junichiro Koizumi, Finance Minister Sadakazu Tanigaki, and Bank of Japan Deputy Governor Toshiro Muto, de Rato stressed that “the recovery has picked up pace and is broadening, and deflationary pressures are lessening.”
The improved situation partly reflects a stronger global economy, but it also “owes much to steady policy efforts at home,” de Rato said. Speaking with reporters at the Japan National Press Club in Tokyo, he commended the reforms implemented under Prime Minister Koizumi’s government, saying that they have benefited not only Japan’s economy but also Asia and the world. The IMF is convinced, that with “the continuation of the reform agenda of the Prime Minister, and with the current stance of the Bank of Japan, things could be even brighter in the near future.”
No time for complacency
De Rato also explained, though, that while the current situation gives considerable reason for optimism, “important challenges remain, and reforms, including to stabilize the public debt and further strengthen the financial system, will be needed to ensure a strong and durable expansion.” Reiterating the message that the IMF staff team conveyed to the authorities during the Article IV consultation in May, he encouraged Japan to take advantage of the current favorable global economic climate to pursue further reforms, not just by tackling remaining corporate and financial sector weaknesses and ending deflation but also by undertaking medium-term fiscal consolidation and wide-ranging structural reforms to boost Japan’s long-term growth prospects.
Economic upswings, such as the current one, de Rato told reporters, offer “a very good moment” for all economies to pursue reforms that will, over the longer term, pay off in terms of sustained growth. Asked specifically about the sustainability of U.S. trade and current account deficits, he said that the IMF, the U.S. monetary authorities, and the U.S. Treasury are in accord on the need for an increase in domestic savings, essentially through a reduction of the public deficit. Indeed, countries with aging populations and those seeking to attract foreign capital should be giving a lot of attention to the issue of public debt, he noted.
As for the potential for a disorderly correction in the value of the U.S. dollar, de Rato said that while volatile movements cannot be ruled out, there is now a “much more calm” situation. But here, too, the moment to begin to redress imbalances is now. If not done, he suggested, those imbalances “will come back to us in a higher degree of volatility.”
IMF view on regional integration
Turning to the push for greater regional integration in Asia, including a possible regional monetary fund, de Rato assured the press that not only is the IMF following such developments in Asia and elsewhere with interest, but it is also taking “an active role as much as we can.” The IMF remains convinced, he said, that there is, more than ever, a need for an international institution to guarantee global financial stability, but it sees no contradiction between the IMF’s international role and regional initiatives such as the Chiang Mai arrangement on currency swaps.
Regarding the prospects for Asian currency integration, de Rato noted that the European Union’s experience testifies to the fact that monetary unions are possible and are successful. But they do entail certain prerequisites in terms of economic and market integration, and they do require political commitment. Currencies are not only economic instruments, he noted, they are also political instruments.
China seeks soft landing
From Japan, de Rato traveled to Beijing, where he met with Premier Wen Jiabao, People’s Bank of China Governor Zhou Xiaochuan, Finance Minister Jin Renqing, and Liu Mingkang, Chair of the Bank Regulatory Commission. The discussions were wide ranging, with considerable emphasis on the current state of the Chinese economy and the authorities’ recent efforts to slow growth to a sustainable level by addressing overinvestment.
De Rato also discussed the exchange rate question and was pleased to hear the authorities reiterate their view that greater exchange rate flexibility is a desired goal for China. The IMF has believed for some time that this policy would be in China’s best interest, as it would provide more room for the country to pursue an independent monetary policy and facilitate adjustment to structural changes. There was also an exchange of views on the Chinese government’s efforts to maintain the stability of the country’s financial system through banking reforms. De Rato restated the IMF’s longstanding commitment to assist that reform effort in any possible way, including with technical assistance.
Rodrigo de Rato’s statements at the conclusion of his visits to Japan and China, as well as the transcript of his remarks at the Japan National Press Club, are available on the IMF’s website (www.imf.org).