• Speeches and Material

“Japan’s contribution in response to the current crisis”
Speech by Mr. Tatsuya Tanimoto
Senior Vice Minister of Cabinet Office

2009 International Monetary Conference
Kyoto, Japan
June 8, 2009


Honorable Members, Distinguished Guests, Ladies and Gentlemen, Good Afternoon. It is my great pleasure to speak before the global leaders of the financial world at this annual IMC meeting.

It is very unfortunate that Minister Yosano has been called to attend a Diet session at the last minute and is unable to attend this meeting. I have humbly taken on his role to address this business luncheon.

It is commendable that the IMC offers a venue for the top management of the world’s major financial institutions to exchange views on issues surrounding international finance and the global economy. It is my hope that this meeting will be an invaluable opportunity for you to discuss the future business models for financial institutions in view of the current financial and economic environment.

I am delighted that this annual meeting is being held in Japan’s historic capital of Kyoto, 18 years after the Osaka meeting of 1991. I would like to express my sincere appreciation to the IMC President, Dr. Ackermann, the IMC staff members, and all those involved in preparations for this meeting.

Today, on behalf of Minister Yosano, I would like to share with you a few thoughts on Japan’s contribution in response to the current crisis.

World economy and Japan’s role

The financial market turmoil has changed the global economic landscape. It shifted from a benign phase where we enjoyed ample liquidity and high growth to a difficult one where we must come to terms with adjustment in global imbalances and correction in excessive leverage. The current world economic situation presents a severe global recession, in which the instability of the financial markets is spilling over to the real economy, together with a substantial deterioration in the growth prospects of both advanced and emerging economies.

The current crisis is often compared with the Great Depression of the 1930s. However, we should pay heed to critical differences between the two crises.

  • First, the current crisis has been taken seriously and has never been overlooked.
  • Second, we all recognize that this crisis cannot be overcome without global cooperation.
  • Third, we are aware that protectionism will have a devastating impact and will cause a deflationary effect by substantially shrinking world trade.
  • Fourth, we have learned important lessons from the experience of the Great Depression. No one disputes the fact that ensuring credit flows and generating demand is critical for our economies to get out of this crisis.

Against this backdrop, Japan’s responsibility to the world as the second-largest economy is to think and act globally in cooperation with the rest of the world. In order to tackle this global crisis, global cooperation is essential and unilateralism will not work. Japan is determined to make its utmost contribution to the international community under the global initiatives.

There are four pillars of Japan’s contribution in response to the current crisis.

  • The first is Japan’s economic policy packages, including its fiscal measures, in order to lead the world economy back to a steady growth path.
  • The second is Japan’s cooperation in the arena of international finance, including through the IMF, the World Bank and the Asian Development Bank.
  • The third is to prevent protectionism so that world trade flows will not be hampered.
  • The fourth is to actively participate in discussions for “re-designing” financial regulation, bearing in mind the root causes of the current financial turmoil.

Japan’s economic policy packages

Let me first talk about Japan’s economic policies.

Global crises require global solutions. Both developed and developing countries must act together to adopt decisive macroeconomic measures, so as to avoid global economic meltdown, while fixing the financial system to repair the functioning of financial markets.

Fiscal and monetary policies in the world’s major economies are essential to prop up aggregate demand of the world economy. We recognize that Japan’s economic recovery and sustainable growth will be an integral part of our contribution to the world.

In the case of Japan, the financial system itself is relatively sound compared with those in the United States and Europe. This stems from the fact that the exposures of Japan’s financial sector to complex securitized products, and the losses the sector incurred from those products, are relatively smaller. Although its financial system is increasingly affected by the deterioration of the real economy and the high volatility of the financial markets, Japan is not in a situation where extraordinary measures for stabilizing the financial system are required, such as capital injections with public funds or temporary bank nationalization. Japan’s megabanks have decided to raise capital from the capital markets without relying on any public support. Thus, the short-term measures in Japan are more focused on maintaining the functioning of financial intermediation in order to support activities in the real economy. Several regional financial institutions have already started to utilize the capital enhancement scheme which was put in place for this purpose.

Despite the relative soundness of the financial system, the Japanese economy has experienced a severe slump because exports shrank dramatically to almost half of the pre-crisis level due to the contraction of external demand. In response, the government has been implementing economic policy packages which will total around 5 percent of GDP in aggregate. Thanks to these measures, the level of Japan’s GDP growth in Fiscal Year 2009 will remain at minus 3.3 percent, a level equivalent to those of other major developed countries. Through these measures, the aim is to keep the unemployment rate below 5.5 percent, the worst level we experienced in decades. Currently the unemployment rate stands at 5.0 percent.

In parallel with these economic policy packages, last December the government adopted the “‘Medium-term Program’ for Establishing a Sustainable Social Security System and Securing its Stable Revenue Sources.” Last March, a bill that sets a timetable and basic ideas for a future tax reform was approved by the Diet, and it has been enacted. The commitment by the government to a fiscal consolidation is vital to the country’s credibility in Japan. A low level of long-term interest rates, around 1.5%, reflects market confidence in Japan’s fiscal policy, despite a high level of outstanding government debt.

Japan also faces longer-term challenges. One is how we can achieve more balanced economic growth led by the “twin engine” of exports and domestic demand. Another is how we can remain innovative so that our global competitiveness will not be impaired. From this perspective, the most recent economic policy package is aimed at pursuing a growth strategy through establishing a low carbon society and addressing the aging of the population.

It is widely believed that John Maynard Keynes observed that governments could generate demand just by hiring people to dig holes and fill them up. But what Keynes really said is that governments should spend money wisely. Thus, our idea of “wise spending” is to spend money for promising fields that will also have an impact for the purpose of short-term crisis management. In doing so, it is important to take advantage of Japan’s advanced technologies and unique characteristics.

Japan’s assistance to emerging and developing countries

The second pillar of Japan’s contribution is our assistance to emerging and developing countries. Japan is committed to fulfilling its global responsibility through extending its support to the rest of the world, particularly to emerging and developing countries.

On the face of this global economic crisis, Japan has argued that the IMF should play an active role in crisis prevention and resolution. To this end, Japan took the lead in the discussions on enhancing the IMF’s financial capacity and expressed its readiness to lend the IMF up to 100 billion US dollars so that the IMF could fulfill its duty. Following the conclusion of our lending agreement with the IMF last February, European countries and Canada also announced their intention to lend to the Fund. At the London Summit in April, participating countries agreed to significantly expand the New Arrangements to Borrow (NAB).

In addition to these global initiatives, Japan has contributed to promoting Multilateralization of the Chiang Mai Initiative (CMIM), which is a swap arrangement to provide the US dollar from members’ foreign reserves, in order to address short-term liquidity difficulties in Asia as a supplement to IMF lending. Apart from the CMIM, Japan plans to offer swap arrangements to provide Yen funds, equivalent to up to 60 billion US dollars, in case of a financial crisis. Consequently Japan’s liquidity support through swap arrangements will be equivalent to 100 billion US dollars in total.

We recognize the need to assist emerging and developing countries in order to mitigate the negative impacts of the precipitous drop in capital flows that had been driving economic growth in those countries. In the context of bilateral assistance, Japan has pledged 5 billion US dollars in support for environmental investment in developing countries for the next two years, as well as an additional 22 billion US dollars over the same period to support trade finance, in order to reduce risk and facilitate trade with developing countries. Furthermore, Japan has pledged to scale up its ODA to the Asian region to 2 trillion yen.

Moreover, in order to maintain capital flows to Asia’s developing countries that are temporarily unable to raise funds through international bond issuance due to market disruptions, we have decided to provide guarantees by Japan Bank for International Cooperation of up to 500 billion Yen on yen denominated bonds, or Samurai bonds, issued in Japanese markets by such developing countries.

It would be unreasonable to expect that the Japanese economy alone will recover on its own. Rather, the idea is that Japan will grow together with emerging and developing countries as their economies regain vigor and become a growth center of the global economy again.

By the way, the current crisis has raised significant questions about how we should address development issues in the future. First, the current crisis has made us realize once again how risky it is for the emerging and developing countries to rely on short-term external borrowing to meet their funding needs for development. Eastern Europe, which has been hardest hit by the current financial crisis, is more heavily dependent on foreign bank borrowing than any other region. Second, another notable finding from the crisis is the limitations of the prevalent development model that relies on external demand. As considerable savings-investment balance adjustments proceed in the US and other developed economies, and the world economy has started rebalancing toward a new equilibrium, emerging and developing countries are facing an increased need to review their development model and to pursue economic growth with a more balanced reliance on domestic and foreign demand. It is our hope that the current crisis will mark a turning point for emerging and developing countries to reinvent themselves and to restart strong and more sustainable growth.

Preventing a retreat into protectionism

The third pillar of our contribution is to prevent protectionist moves. One of Japan’s highest priorities in the current economic environment is to coordinate globally with the rest of the world, so as to uphold the free trade regime and avoid a retreat into protectionism. Economic nationalism tends to emerge in response to an economic situation of this sort. Thus, it is vital to prevent the advent of protectionism. Otherwise, world trade would dramatically decline and the world economy would shrink accordingly, as the “Great Depression” has shown us.

This spirit of anti-protectionism has been endorsed by the G7 and the G20. Given the lessons learned from the past, it is necessary to avoid any protectionist measures, to refrain from introducing trade barriers, and to enhance and facilitate trade in order to ensure global economic growth. In this light, it is important to extend assistance to trade finance for emerging and developing countries. We expect international organizations, such as the WTO and WCO, to play active roles in monitoring protectionist measures around the globe.

Crisis prevention and re-design of financial regulation

Fourth, let me talk about crisis prevention and the re-design of financial regulation. The root causes of the current financial crisis lie in excesses in the financial sector alongside macroeconomic factors such as global imbalances. The low level of interest rates and the benign macroeconomic conditions nurtured an inadequate appreciation of the risks. Under these circumstances, some financial institutions failed to manage the risks associated with financial innovations like securitization in their business models.

This financial crisis has made it clear that the concept of an unfettered free market, or “market fundamentalism”, could endanger the whole economic system through allowing excessive risk-taking and overleveraging in pursuit of short-term profit maximization. We must recognize that the economic system of capitalism, while based upon market functions, must be properly complemented by government policies and regulations.

Governments needs to take care of their people and their national economies. Thus, it is expected that governments understand the limitations of the market and respond flexibly to circumstances as needed, which can be called “market pragmatism”. Our aim should be to become a “wise government” in this sense.

We are now at a phase where the pendulum must swing toward more focus on security. Our challenge is to prevent the recurrence of another crisis and it is vital that we re-design financial regulation. Accordingly, the financial services industry is expected to correct the financial business model which deployed excessive leverage and opaque financial products in pursuit of short-term profits.

The broad direction of changes in financial regulation has been endorsed in the series of G20 Summit meetings. The Washington Summit confirmed the following common principles: (1) strengthening transparency and accountability, (2) enhancing sound regulation, (3) promoting integrity in financial markets, (4) reinforcing international cooperation, and (5) reforming international financial institutions. Under these principles, substantial progress was made by the time of the London Summit last April. Building upon this progress, we must continue to work steadily toward re-designing financial regulation for the future, while at the same time avoiding stifling financial innovation by over-regulation.

I take a little comfort in the fact that the financial sector in Japan did not indulge in financial excesses such as overleveraging. Being somewhat detached from the problem and having experienced severe financial stress after the bubble burst in the 1990s, Japan has advocated truly necessary reforms in financial regulation in the process of the G20 Summit, and will do so further ahead.

For instance, one of the root causes of the current crisis is that some financial institutions did not fully capture the risks associated with complex financial products. Thus, while containing excessive leverage, we must avoid hastily raising the regulatory minimum level of capital. Rather, we should focus more on strengthening the risk capture at financial institutions so that the capital level of each financial institution corresponds to the risks inherent in its business model.

While it is essential to re-design financial regulation in the medium-term, care must be taken in phasing the implementation of measures, because too-hasty implementation of medium-term measures could exacerbate the current situation and make crisis management even more difficult. Japan’s experience in the 1990s suggests that it is important to strike the right balance between short-term stabilization measures and medium-term reforms. Thus, we have repeatedly emphasized that these two categories of policies must be pursued in such a manner. This argument has been reflected in the Declaration at the London Summit. For example, it states that “until recovery is assured the international standard for the minimum level of capital should remain unchanged.”

Concluding Remarks

Finally, I would like to make a few remarks on the future of the financial services industry after the current turmoil.

Under the current financial and economic conditions, it is needless to say that the role of financial institutions is important. Japan is committed to achieving the recovery of jobs and growth, as well as ensuring financial stability in the context of global cooperation. In the current environment, I expect financial institutions to maintain credit flows through their functions as financial intermediaries.

In view of the current financial turmoil, I hope that every financial institution will check whether their business models allowed excessive risk-taking. In that process, it should be reaffirmed that the role of the financial business should lie in supporting value-adding activities in the real economy. The financial sector should not wag the real economy like a tail wagging the head, as witnessed in this crisis. As a result of such reflection, it is expected that each financial institution will adjust its business model as needed through its own business judgment.

I expect the financial services industry to make creative efforts to adapt to a new, re-designed regulatory environment and provide high-quality financial services. It is necessary to rebuild moral discipline in the financial markets and financial innovations must flourish along that discipline. I have learned that one of Minister Yosano’s favorite words in English is “decency.” This word means “honest” behavior, “following accepted moral standards”, and “showing respect for others”. It is essential that the financial sector regains true decency.

Japan is firmly determined to actively contribute to overcoming the current financial and economic crisis and to preventing the recurrence of another crisis in the future. I hope that Japan’s initiatives, combined with efforts by the financial leaders participating in this meeting, will be able to contain the current crisis, achieve a more stable and reliable financial system, and lead to sustainable prosperity of the global economy supported by improved quality of financial services.

Thank you.

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