Transcript

Transcript of the World Economic Outlook Press Conference, by Kenneth Rogoff, Economic Counsellor and Director of Research, IMF

April 18, 2002

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Participants
Graham Hacche, Deputy Director, External Relations Department
David J. Robinson, Senior Advisor, Research Department
Tamim Bayoumi, Director of the World Economic Studies Division, Research Department

MR. HACCHE: Good morning, ladies and gentlemen. Welcome to this press briefing on the IMF's latest report on the World Economic Outlook for April 2002.

Simultaneous interpretation is available through the headsets provided, with English on Channel 4, French on Channel 11, and Spanish on Channel 6.

The contents of this World Economic Outlook and the press briefing are under strict embargo until 11 o'clock Washington time this morning.

I am Graham Hacche, Deputy Director of External Relations at the IMF. To my right, to answer your questions, are Kenneth Rogoff, Economic Counselor and Director of Research at the IMF, under whose general direction the WEO is prepared. To Ken's right is David Robinson, Senior Advisor in the Research Department, who directs the WEO project, and to David's right is Tamim Bayoumi, Chief of the World Economic Studies Division.

I will turn to Mr. Rogoff first for some opening remarks before turning to your questions. Thank you.

MR. ROGOFF: Greetings, ladies and gentlemen. You have before you the April 2002 World Economic Outlook. We estimate that global growth for 2002 will be 2.8 percent, bringing world GDP, using our purchasing power parity weights, to $49 trillion. For 2003, we estimate global growth to rise again to 4 percent, corresponding to output (at PPP prices) of $52 trillion. Partly due to the downturn, but also to enhanced policy credibility, inflation is projected to be at record low levels. In the advanced economies, we project an inflation rate of 1.3 percent in 2002—the lowest level on record, and 1.8 percent in 2003. The 2003 value is roughly in line with what we believe to be a good benchmark target for monetary policy—in the range of 2 percent.

For developing countries, inflation is also at a low 5.8 percent in 2002 (just above the 5.7 percent in 2001), then dropping to a record low of 5.1 percent in 2003.

The recovery is projected to be led by the United States, where GDP growth is expected to be 2.3 percent in 2002 (it could even turn out higher) and 3.4 percent in 2003. In Europe, whose growth rate never fell as sharply as the US, and where the policy response was less aggressive, growth is expected to pick up a little later—growth in the European Union is projected at 1.5 percent in 2002 and 2.9 percent in 2003. For Japan, however, the recovery is more fragile, with growth at -1.0 percent in 2002 and 0.8 in 2003. In comparing across regions, one must recognize, for example, that population growth is somewhat higher in the US than in Europe, so that per capita differences in growth rate projections between the two regions for 2003 are fairly similar.

Last September, you pressed me hard on whether the IMF officially viewed the projected downturn as a global recession. My answer was that we did not have an official definition. No one seemed to believe me, though it was true. In this World Economic Outlook, we looked closely at the question of what constitutes a global recession, and concluded-looking at per capita output growth as well as many other variables such as world trade and industrial production-that the years 1975, 1982, and 1991 did, officially, constitute global recessions. For 2001, it was a very close call, but we decided that the outcome was just slightly above what we could officially declare a global recession (see Box 1.1 of the WEO). We acknowledge that it is a matter of semantics whether one wants to call 2001 the mildest global recession in recent years, or the most severe downturn that was not a full-fledged recession.

The National Bureau of Economic Research in the United States faced a similar quandary, and decided to call the US downturn a recession. In truth, the US downturn probably does qualify as an employment-growth recession, but probably does not qualify as a full-fledged output recession. The reason, of course, is that productivity growth held up to a degree that is quite unusual, so that even though employment growth was negative over several quarters, output fell only in one quarter. Productivity growth means the same number of workers are producing more. This is good news, and encourages us to think our optimistic analysis on productivity growth associated with the IT revolution in the October WEO was correct. There, based on historical analogy with earlier technological revolutions including electricity, railroads, and the steam engine, we argued that despite the current downturn, the medium-term productivity trend outlook was very positive, indeed not only for industrialized countries but also for developing countries.

While the outlook is positive, there are several areas of vulnerability. The first corresponds to global imbalances, including not least the persistent pattern of current account deficits in the United States and surpluses for the rest of the world. The US current account is a global issue, not a US issue, which has mainly been driven by the high level of productivity growth in the United States relative to the rest of the world. With the US expected to lead the upturn, the US current account deficit may grow further. This is a medium-term risk, and the issue is not so much a downgrade in credit ratings for US borrowers (as has been happening in Japan), but rather a concern that a sharp correction of the current configuration of current accounts could lead to a sharp realignment of exchange rates.

A second risk is the high level of corporate and consumer debt, and high equity prices, as emphasized in the IMF's Global Financial Stability Report. A third risk comes from Japan, which is mired in its third recession in a decade. In one of the analytical chapters in the WEO, we discuss how countries experiencing serial recessions - e.g., Switzerland in the 1990s, the UK in the 1970s - typically have significant structural problems that prevent them from emerging fully from their cycle of downturns. The fourth risk consists of non-economic events: Fundamentally, the global economic recovery is very solid, but incidents such as a sustained conflagration or a repeat of the events of September 11 could undermine confidence and stall the recovery. Oil price rises are a dimension of this risk. Current spot market and futures markets prices for oil are roughly in line with our baseline projections, $23 average for 2002, and $22 for 2003. However, a sharp spike in oil prices would have a significant adverse impact on the global economy. I don't want to overstate the case: in the WEO we give a table suggesting that a rise for one year of 5 dollars per barrel would take 0.3 percent off of global GDP growth. A much larger effect would probably require having some other adverse shock hit in parallel, though especially with reference to conflagration and non-economic events, this is a risk.

Finally, a word on policy responses. Part of the reason why the slowdown was mild is that, simply put, slowdowns have become more mild over the last fifteen to twenty years, and even more so over the broader sweep of history. We show this in Chapter 3 of the WEO; some of the explanation has to do with better monetary and possibly better fiscal policies. Nevertheless, it is important to commend the policy response by the industrialized countries, especially by the US Federal Reserve Board and, to a lesser extent, by the ECB.

The timing of the US tax cut was also fortuitous, and it is fortunate that the euro area interpreted its growth and stability pact in a flexible fashion, allowing the automatic stabilizers to work. In the rest-of-the-world, countries which reduced vulnerabilities, for example by moving to more flexible exchange markets, generally weathered the storm better than countries with less flexible markets and a weaker macroeconomic policy framework. Last, but not least, the IMF did its job. Especially noteworthy is the Managing Director's Statement of October 5, in which he encouraged the industrialized countries to pro-actively fight the downturn, and made clear that the IMF would recognize the exogenous global nature of the shock facing many developing countries, in evaluating their eligibility for assistance.

Going forward, as the recovery picks up steam, it will be important for industrialized countries to look to their medium-term budget positions. The time has passed for tax cuts and government spending rises aimed solely at fighting the slowdown. Monetary policy will need to begin balancing the risks of inflation with the fragility of the recovery. Short-term real interest rates are very low. They cannot be sustained at these levels indefinitely without creating inflation, and, as the WEO suggests, the easy cycle must be reversed as the upturn takes firm hold.

With this, ladies and gentlemen, I am ready to take your questions.

MR. HACCHE: Thanks very much. Can I ask you please to make sure that your microphones are switched on and also ask you to identify yourselves? In the second row, please.

QUESTIONER: Mr. Rogoff, U.S. Treasury Secretary Paul O'Neill has said that the current account deficit is a meaningless concept and that U.S. policymakers shouldn't even pay attention to it. His argument is that businesses and investors make their decisions based upon the highest risk-weighted potential returns; the markets grind finely, and therefore, a current account deficit is simply an accounting reflection of a group of individual decisions and really doesn't have any bearing on policymaking.

Can you explain why he is wrong, and indeed, are you concerned that the U.S. Treasury thinks that your number one concern about the global economy is a meaningless concept?

MR. ROGOFF: First of all, the current account does also arise out of government policies, and in particular, government budget deficit policies affect the current account, the current account involves the sum of private saving and government saving, so certainly government policies impinge on what the current account is.

Second, while I agree that certainly a country enjoying strong productivity growth and that is enjoying investment from around the rest of the world flowing into it is fundamentally a good situation. It is nevertheless a historical experience that when countries run sustained current account deficits up in the range of 4 and 5 percent of GDP, they are eventually reversed, and the consequences, particularly in terms of the real exchange rate, can be quite significant. Indeed, there was a Federal Reserve study on just this point not so long ago.

Now, it's true that during the 1980s, a similar situation arose. The U.S. current account was in deficit. There was a sharp reversal. The dollar depreciated sharply, and the effects were arguably not so great.

I think it is difficult to foretell exactly what might happen today, especially given the increasing sophistication and development of financial markets, where there might be highly-leveraged individuals and companies that we don't necessarily have good information.

So it is a risk and vulnerability. You certainly wouldn't want to have lower growth in order to improve your current account; high growth is fundamentally a good thing, but nevertheless it is a vulnerability.

QUESTIONER: The WEO says that the trade performance is improving, domestic demand is recovering, that the economy is expected to gain strength, and that the fiscal policy remains on track in Brazil.

Is everything rosy with the largest economy in South America?

MR. ROGOFF: Well, you have quoted us in the World Economic Outlook, what we say about it.

Certainly, the current policy stance is strong. There had been some slight uptick in inflation, although it appears that that is being addressed. Naturally, there are some concerns having to do with the fact that it is an election year, and many countries during election years sometimes slip in their attention to fiscal balance. But we don't see that at the moment in Brazil.

David, did you want to add anything to that?

MR. ROBINSON: Just a couple of points. As Ken just said, Brazil has done very well, and I think it has managed the implications of the recent global downturn pretty well. And part of the recognition of that in markets, I think, is the fact that contagion from Argentina has been relatively moderate, and that is praise for markets on the success of Brazilian policies.

Are there risks looking forward? There always are in every economy, and Brazil is no exception. Brazil still has a high level of public debt, quite a lot of which is foreign exchange indexed, and over time, it needs to reduce its vulnerability in that area.

One way, of course, is sticking to the primary surplus target of 3.5 percent of GDP, if I recall, that is enshrined in the fiscal responsibility law. That is really very important.

I think another thing, as we talk about in one of the essays in the WEO this time, is to gradually increase openness to the world economy, because that reduces the debt ratio to exports as you raise exports, and I think that is also an important medium-term objective for Brazil.

QUESTIONER: Mr. Rogoff, you said in your report that many, if not most, of the imbalances that led to the current slowdown are still in place and that there is a chance that they may unwind in an unwieldy fashion.

Given that that is the case, what sort of expectation do you have or what are the odds that we may have a double-dip recession in the United States and the global economy?

MR. ROGOFF: I think the odds of that happening at this point are fairly low, that the U.S. policymakers are quite vigilant to that; indeed, they are maintaining a fairly aggressive easing stance at the moment in order to try to minimize that risk.

That said, I mentioned some of the possible vulnerabilities in the world economy, especially non-economic events. Certainly anything is possible. But fundamentally, we don't view that as terribly likely.

QUESTIONER: If I may ask about your forecast for the Japanese economy, what will be the implications of such a relatively slow recovery in Japan, both domestically and internationally? Domestically, how much positive impact will it have on unemployment, business bankruptcies, and probably the day-to-day living of the ordinary people in Japan; and internationally, how much positive impact will it have on the rest of the world, especially the other Asian economies?

Do you still see any real possibility of Japan becoming an engine of the world economic growth again in the foreseeable future?

Finally, what is your reaction to the results of the latest bank inspection by the Japanese authorities? Thank you.

MR. ROGOFF: Well, on your question about can Japan become an engine of growth for the global economy, clearly, that is not our forecast for 2002 and 2003. Over the longer term, that is certainly possible that productivity in Japan, underlying productivity, is good provided that the country presses ahead with structural reforms including cleaning up the banking problems, corporate sector problems, things ranging from the health service to expenditures in state corporations.

I think also a very important thing for Japan is to end deflation, and virtually in any way going ahead in Japan, it is important that the Bank of Japan engage in a fairly aggressive policy to end inflation as soon as possible. If we look at our Recessions chapter, we find that of the very large number of post-World War II recessions we looked at across the OECD countries, the Japanese case is actually the only one of deflation. It is very unusual post-World War II, although prior to World War II, that was common. And the effects are very serious, and it is something which should be reversed.

I want to acknowledge that there is no magic bullet for ending deflation smoothly. It is difficult to navigate monetary policy when you are in a situation of lower zero interest rates. You need to use quantitative easing. And it is difficult to tell after a sustained period of doing that how quickly inflation will shoot up. It is a risk. Nevertheless, we feel that especially as part of a larger package of structural reforms, that is an important risk to take.

QUESTIONER: Could you reply to the last part of his question on the banking sector inspection?

MR. ROGOFF: Yes. Certainly it is a move in the right direction, but there is still more to be done. Let me turn to Tam Bayoumi to see if he has anything to add to that.

MR. BAYOUMI: Yes. On the special inspections, obviously, it was a move in the right direction. It did lead to a significant downgrade in the loans of the 149 large companies involved of the order of 7 trillion yen, 1.5 percent of GDP.

At the same time, it should be recognized that these companies only cover 4 percent of bank loans in Japan. Now, they are companies with particularly difficult situations, so you would expect them to have particularly bad situations in terms of their Bank loans. Nevertheless, we continue to believe that the problem may be much wider than these particular companies and that a correct assessment of the NPLs would lead to a significant reduction in the capital ratios of the Japanese banking system.

QUESTIONER: The forecast for Argentina is minus 10 or minus 15 percent for 2002. I was wondering what is the level of inflation for that forecast, or what level of inflation that implies; and second, how do you see the lifting of what they call the "corralito" and the implications for this forecast?

MR. ROGOFF: Let me just answer about the forecast. We give a range of forecasts for Argentina acknowledging the considerable uncertainty there, and our inflation forecast has a range in the neighborhood of 30 percent, as you can see in that table.

Beyond that, on your other questions, as I'm sure you know, the IMF has a team returning today, and they are going to report to the IMFC, so I don't really think it is appropriate for me to make any further comment at this time.

QUESTIONER: With respect to the policy responses to the economic downturn, you said that you also made a flexible interpretation of the budget restrictions in Europe. What is your view on the recent debate going on in Europe on the Stability Pact and whether the 3 percent limit should be lived up to in the near future?

MR. ROGOFF: I think the Stability Pact has performed a very positive role throughout much of Europe in stabilizing medium-term and long-term budget balances, and in fact, although I guess Keynesian theory would also say that trying to stabilize your budget in this way might be something that hurt growth, I think we see through its effects on confidence, through its effects on interest rates, there is also a positive effect. So it has certainly performed a very positive role in the short run, I think, as the credibility is gained, and looking forward into the future, there may be scope for interpreting it more flexibly than it has at the present. I think it has performed a very positive role and probably continues to perform a positive role, but I think it is quite sensible and reasonable to constantly consider reevaluating it.

QUESTIONER: Mr. Rogoff, could you elaborate a little bit more about the combination of the two deficits here in the U.S. economy, the fiscal deficit and the external deficit that you mentioned in your first remarks.

And for Mr. Robinson, I would like you to explain a little bit more the concern about the election year in Brazil. Are you concerned about the results of the election?

MR. ROGOFF: First, on the twin deficits in the United States, this last episode on the nineties and up to the present current account deficits really cannot be characterized as a twin deficits problem. It was in the eighties; the U.S. had a current account deficit where the fiscal deficit played a substantial role. During the nineties, of course, the budget had been in surplus throughout much of the period, and the U.S. was still running a current account deficit, and this is largely coming from the low and declining private sector saving and also the high level of investment in the United States.

So, looking forward, I think all there is really to say about the twin deficits is that the current account deficit is high, and certainly, if there were a move into sharp and sustained budget deficit in the United States, that would almost certainly raise the U.S. current account deficit, and it is already somewhat high.

So it is not so much that the budget deficits have been responsible for the current account deficit; it is really driven mostly by United States productivity which has been very strong relative to the rest of the world. But nevertheless, policy has to acknowledge the current position of the current account. David?

MR. ROBINSON: Are we concerned about the results of the Brazilian election? No, of course not. Brazil is a democracy, and we will respect the decision of the Brazilian people whatever that turn out to be. The Fund has always done that and is always ready to work with whatever government is elected.

I think the issue related to the election is not so much the result; it is just that, just as in any country where there are elections, things become more uncertain in the run-up, and sometimes it is more difficult to get things done. And I think one of the challenges to the Brazilian authorities over the next month will be to try to push forward with a structural reform program in particular in what is obviously a more difficult environment in the run-up to the elections. But those reforms are important, and the more progress that can be made on them, the better.

QUESTIONER: Your report is forecasting the Euro Zone follows the U.S. up. Do you sense an independent economic pulse beating at all in the Euro Zone?

MR. ROGOFF: Please repeat the end of your question; I couldn't hear it.

QUESTIONER: Your report forecasts the Euro Zone to follow the U.S. up in this out-turn. Is it your sense that there is an independent economic pulse beating in the Euro Zone? You name a setback in Germany at the top of your risks; do you think it is fair to regard Germany as the weak link in the common currency pact, common currency regime? And looking at the ECB, your sense is that the policy is appropriate for the time being, or is appropriate at the moment. Would you expect interest rates to start rising in the course of this year to confront core inflation which is actually quite sticky and above the ECB's target?

MR. ROGOFF: Let me start with your question about the synchronicity between Europe and the United States. Certainly, many had marked the global downturn we just experienced as unusual in its synchronous nature. One of the interesting conclusions we got, which you will see in Chapter 3, by looking more closely at this is that actually the synchronous nature of the downturn between Europe, the United States, and the rest of the world is actually more or less the norm rather than the exception; 1991 was the exception.

We find, for example, that more than half the time, more than half the large set of countries we look at tend to go into recession together. So Europe and the United States are not perfectly correlated, but there is a large measure of correlation.

Some of this is trade links, and some of it is simply common shocks by oil prices, the global technology, and perhaps monetary policy stance being followed similarly.

In response to your question about the ECB's monetary stance, I think that the current stance is broadly appropriate, because a) there are vulnerabilities as I mentioned, and b) credibility is fairly strong in Europe so that there isn't any urgency necessarily in addressing the inflation issue.

Nevertheless, over the longer term, the ECB has chosen the inflation rate as its target, and if the economies continue to grow robustly, as our forecast shows, certainly starting by the end of 2002 and 2003, they will almost certainly indeed begin raising their interest rates.

QUESTIONER: What explains the containment of contagion in Argentina, and what economic policy advice do you have for the Chavez Government in Venezuela?

MR. ROGOFF: The first question on the containment of the contagion from Argentina largely has to do with three factors. One is that it was largely anticipated, so that to some extent, the contagion had happened already beforehand.

A second factor is that flows to emerging markets had been fairly low for a sustained period, and situations of the most severe contagion historically tend to come at times of peak flows rather than low flows, for obvious reasons—there is more leveraging and such.

And finally, Argentina's trade links with the rest of the world are fairly low, and in fact, that indeed is an issue in Latin America that we also look at in Chapter 2, where we look at the fact that Latin America has tended to have more debt crises than other regions of the world, and one of the factors has to do with its relative closeness to trade.

On your second question, I think events are just too recent to have anything concrete to say at this point.

QUESTIONER: I have an additional question to my colleague from Frankfurt in the first row. If I look at the monetary policy, on page 6 of your World Economic Outlook, your assumption is that LIBOR rate in the Euro area and the United States is the same, 4.5 percent on average. Does this mean that monetary policy will also be the same level in the next year, and what are your arguments for the equalizing of this stance between—and what is your assumption on the level of the foreign exchange rates in this projection?

MR. ROGOFF: Well, this is an easy question to answer, because first, our assumption about foreign exchange rates is that the real rates stay constant in foreign exchange rates.

It is extremely challenging and difficult to predict exchange rate movements among the industrialized countries beyond that, so that is what we adopt in our forecast.

For interest rates, we assume that current policy frameworks stay in place. I don't think you can infer from the numbers that we use in the forecast any nuances about how U.S. monetary policy and ECB policy will match up. It is simply a margin of error in our forecast, the constancy we are assuming there.

QUESTIONER: I have two questions, if I may. One, could I ask you to clarify whether you think that the U.S. Administration's current spending plans, and indeed their tax proposals, risk creating the twin deficit problem that you mentioned?

Second, just to be parochial for a second, you notice on the UK, or you warn the UK that caution will need to be exercised on introducing new expenditure measures. I wonder if you have had time to absorb yesterday's news of the biggest increase in public health spending in 50 years in the UK, and I wonder if they are following your advice?

MR. ROGOFF: In answer to your first question about the United States, there are a number of measures actively underway, so I am not commenting on them here beyond simply that we feel that medium-term budget balance is something that is very important to look at if indeed, as we believe, the United States is entering a fairly strong and healthy recovery.

So that certainly, decisions about the size of government are one thing, but decisions about using government policy, say, for stimulus purposes, we certainly wouldn't think makes sense. And in fact, the fact that there had been budget surpluses through the nineties is part of what gave the United States breathing room to respond in reaction to the most recent downturn.

In response to your question on the UK, here, I think it is principally a question which has to do with the size of government rather than macroeconomic balance per se. The current policy team in the United Kingdom has an exemplary record, as you know; there hasn't been a single quarter of negative growth for 10 years; inflation is under control; last year, the UK had the best growth performance in the G-7.

So looking forward, we certainly will look at the medium-term budget implications, although I am not prepared to say anything about that today, but I would see this in the first instance as a decision about the role of government in public health, because there were tax increases accompanying the fiscal policy expenditure increases.

QUESTIONER: Now that the Washington Consensus has changed, and economic policy is accepted as being related to social policy and public policy generally and the need for government regulation to allow markets to work properly, is there any sense in the IMF that a major structural problem which is non-economic should be regulated—namely, that the commodities cannot handle market imperfections in the short and medium term, that if there are natural disasters or other sorts of problems which hit commodities, you get major structural problems; and isn't this therefore a time to come back to the idea that commodity markets because of their very nature—I mean primary commodity markets like coffee and mining materials and so on—have to be regulated to iron out market imperfections.

MR. ROGOFF: Well, we fundamentally believe that the commodity price swings result from market forces that have re-equilibrating effects, and certainly, efforts at major intervention are likely to produce perverse incentives and problems rather than something we would encourage.

QUESTIONER: That is only true in the long term, not in the short and medium term, isn't it?

MR. ROGOFF: It is true in the short and medium term as well.

QUESTIONER: I think the Korean economy gets a good grade from your report issued today. You particularly point out that the Korean economy has signs of recovery not only in the emerging markets but also among the newly industrialized countries.

Do you think there are any special reasons why the Korean economy has a good grade?

MR. ROGOFF: I think the strong recovery in the Korean economy partly reflects that structural reforms were adopted in response to the crisis that occurred in 1997, and Korea is enjoying some of the benefits of this in its stronger growth performance today. I think that's all I would have to say to that.

QUESTIONER: Mr. Rogoff, do you have any concern about the fiscal position in Mexico, considering—these two things—one, the limited fiscal reform we had early this year after 10 months of discussions in our Congress; and second, the amount of liabilities in the pensions that we have to face in the forthcoming years, knowing that the research we have created for that purpose is insufficient. Do you have any concern about the fiscal position?

MR. ROGOFF: Well, the IMF always pays attention to medium-term structural fiscal balance, so it would certainly be the case in any country. But fundamentally, the macroeconomic policies in Mexico have been very strong, and that is partly reflected in how Mexico has done relatively well in weathering the downturn.

There are certainly many areas—and you have mentioned one of them—where it is important to continue to press ahead with structural reform.

QUESTIONER: You speak about containment in the region in Latin America regarding the Argentina crisis, but I would like to ask you two questions. First, I see that in this World Economic Outlook, you have projected a growth in GDP for the region of 0.7 percent, whereas you projected 1.7 percent in December 2001. I would like to know if this has to do with the weight of Argentina's crisis in the region.

Secondly, you also say in this World Economic Outlook that although the spillover has been contained, there are still some risks. I would like to know to what extent you expect this to happen.

MR. ROGOFF: Well, I think that in stating that there are still some risks, the situation in Argentina is very serious and out-of-the-ordinary, so it is certainly prudent in writing up a report like this to state that although there hasn't been that much contagion so far, with some exceptions, that it is something that we cannot indefinitely rule out.

But I think on the whole, if we look at the global downturn, the markets have rewarded countries that have followed flexible policies and had a strong macroeconomic framework, and the markets have shown good ability in discriminating. But certainly, nevertheless, we have some concern, and that is partly reflected in the lower growth numbers.

MR. HACCHE: One last question.

QUESTIONER: Your report urges the BOJ to engage in aggressive quantitative easing, even if it means yen depreciation. In fact, it seems to me you suggest that yen depreciation would be a good thing for the Japanese economy. But what would be the international repercussions, and in particular, wouldn't it exacerbate the very current account imbalances that you cite as such a major risk?

MR. ROGOFF: The main vulnerability of the global economy lies in a sustained downturn in Japan rather than policies which would lead Japan to grow again. So it is indeed true that if Japan adopts the package of structural reforms that we suggest in the WEO—and these include bank reform, aggressive moves toward restoring some positive level of inflation—we would not necessarily be extremely concerned about some measure of yen depreciation. It is true that there would be mixed effects across the region, but the risks are greater if there is a sustained downturn in Japan over the long-term than the short-term risks that would be engendered should these policies that we are advocating have some depreciation as a byproduct.

I want to add one other thing. It is not a one-way street that the yen could depreciate. It could also appreciate. The story I was telling about the United States current account, if that were to sharply reverse itself, and the Japanese surplus were to be reduced, that would actually conceivably lead to quite a sharp yen appreciation, and there are definitely scenarios under which that could happen.

MR. HACCHE: Thank you. Can I remind you of the 11 o'clock embargo, and thank you all very much for coming.