Transcript

Transcript of an Address to the Foreign Correspondents' Club of Japan, by Rodrigo de Rato, Managing Director, IMF

August 3, 2006

Daniel Sloan, President, Foreign Correspondents' Club of Japan: Ladies and gentlemen, distinguished guests, fellow journalists, welcome to the Foreign Correspondents' Club of Japan. We are honored today to welcome the managing director of the IMF, Mr. Rodrigo de Rato.

As I always do, I just asked you about the phones, and again we have got cameras in back, so to remind you to please stay seated during the course of our speech and Q&A session.

Our guest today is in Japan on a very brief visit to discuss, among other things, the Medium-Term Strategy for the IMF, as well as the Japanese economy, a variety of global economic and fiscal issues, with counterparts at the finance ministry, central bank, and, I am told, also with Prime Minister Koizumi. Last week the IMF said Japan's deflation period had ended, monetary policy though should remain accommodative. It forecast Japanese expansion at 2.9% this year, with a view of 2% for the following year. It also said that the dollar was overvalued by 15-35% I believe, but in the subsequent days Japan has responded that currency adjustments alone should not be used to solve global imbalances.

The issue of global imbalances is one that I think will be on the table, and raised by a number of journalists for the IMF in the coming weeks. Some say in terms of monetary policy the IMF has not been capable or had the mandate to act on currency policy to date, and we will see whether the Medium-Term Strategy or changes ahead in the September meeting in Singapore provide any greater latitude in that regard. Our guest is a former finance minister from Spain. He has visited the club in that capacity and also as managing director we were just learning before we got started. We are very happy to welcome him back to Tokyo and our club. With no further ado, Mr. Rodrigo de Rato.

MR. DE RATO: Thank you very much. First of all I want to thank you all for your presence here, and I am very happy to be back in the Foreign Correspondents' Club in Tokyo to present you with some of the ideas that the institution I have the honor of leading is putting forward regarding the needs of our member countries in a globalized world. This is what we call the Medium-Term Strategy. It certainly has implications for all our members, and specifically implications for a country like Japan. I will also take this opportunity to add some words about economic developments and prospects in this country.

Our strategy tries to set the framework for the future direction of the institution, and certainly the motivation behind putting forward a strategy is related to what we see as the needs of the member countries in the 21^st century. Specifically the effects of globalization in all member countries, not only emerging and low income countries, but also developed economies. I had the opportunity of outlining this Medium-Term Strategy to the constituents of the Fund in the annual meetings of last September in Washington, then again an implementation roadmap in Washington in April, and it will be part of the discussions, specifically in some of the issues like surveillance and quotas in Singapore in a few weeks from now. As I said, in a month's time the Fund members will meet again in the 2006 annual meeting in Singapore, and we will be able there to go over some of the key questions that I think affect both the members in terms of surveillance, and also the institutions in terms of governance.

The strategy covers not one single area or two areas, but all the areas of foreign activities. It is proposing changes in the way we conduct bilateral surveillance, individual surveillance for member countries, which you probably know as Article IV Consultations. It also covers changes in the way we address global surveillance beyond our traditional or economic outlook. It presents changes in our approach to preventing and dealing with financial crisis in emerging economies. It refocuses our activities in low-income countries, and I had the opportunity last Monday in Washington to present a very long paper about that. Also it produces changes in our own governance, both in terms of streamlining our institution, having a more medium-term budgetary prospects, but also regarding the need for the institution to reflect the changes in the global economy, and introduce changes in the quotas, and for example, participation of member countries.

Let me refer today here in Tokyo to some of these changes. Surveillance. Surveillance is probably the core mandate of the Fund. When the Fund was established in 1944 in Bretton Woods, it was created to improve surveillance of its member countries, and try to avoid the mistakes that the lack of surveillance have produced in the world economy in the 1930s. In that respect we are proposing important changes, both in the policies and practices of surveillance to make it more effective, and at the same time helping member countries to tackle some of the most important problems they are facing.

Let me just mention two of these changes. One that refers to global economy. That is Multilateral Consultations. That means that not only we will address consultations at bilateral levels with member countries as we do right now with Article IV Consultations with 184 countries, but we will start looking at global issues having multilateral settings in which different economies for different reasons will get together with the staff of the Fund to discuss global issues.

The first of such Multilateral Consultations has been enlarged to address global imbalances, and we have asked a group of economies—the United States, Japan, China, Saudi Arabia, and the Euro area—to work with us to be able to look at global imbalances that could be a threat to world expansion, and look at ways in which in a comparative manner those imbalances can be managed and reduced. That has already started and will take probably the rest of this year to continue discussions with the different authorities at a bilateral, but most importantly at a multilateral level.

We believe that narrowing global balance of payment imbalances, like we see in the large current account deficit of the United States, and also in the large surpluses of external accounts in other countries—China, Japan, and Saudi Arabia, among others—is key for maintaining robust global growth. In that respect, Japan, as a major economy, which as I said also has a large current account surplus, is an important participant in this consultation. This consultation is at a relatively early stage, and it will take time to evolve. I think we all realize that changing macroeconomic conditions, even at the national level, is a very slow process, and it will continue being a very slow process at the global level. But nevertheless we believe that a comparative approach could be very helpful for the world economy in the future.

Another element of the Medium-Term Strategy regarding surveillance is going to be a more focused approach by the Fund on financial sector issues. Understanding financial and capital markets is as fundamental to the Fund work today in surveillance as is understanding fiscal and monetary exchange rate policies, and we must make sure that its importance is systemically reflected in the work of the institution. This effort of making the Fund more knowledgeable and more relevant in financial markets, understanding its consequences on macroeconomic and monetary policy, will take many forms. We will have on-hand analysis of the financial sector in our country reports, and I also envisage to renew emphasis on risks to financial market stability, building on the work that we do in our annual Global Financial Stability Report.

Let me now refer to another element of the Fund's Medium-Term Strategy, which is the question of a fair and comprehensive representation of members. We all realize there have been significant revisions to relative shareholders since the early 1990s, when Japan's quota was increased substantially to reflect its rise in economic weight. And I believe it is time now to recognize the rise in economic weight of a number of other countries—including some of the largest emerging market economies, some in Asia—is necessary, and by that we will have to increase their relative quotas and voting shares.

At this stage I envisage that we tackle the issue in a two-year program of action, beginning with some key decisions in Singapore by next month in the middle of September. This would include immediate action and quota increases for a few countries, whose quotas are mostly clearly out of line with their weight in the global economy, but I would also want our members to agree in Singapore to move during the next two years on more fundamental changes. Those changes will include further round of ad hoc quota increases for underrepresented members following a review of the formula that we use to calculate the quotas, making it more transparent and more relevant, and also to make rebalancing a permanent feature of future general quota increase. They will also include measures to protect the voice and representation of low-income countries that continue to borrow from the Fund, but have only a limited share in the Fund voting.

To achieve this I would like to see an increase in the number of basic votes, which are the minimum and equal number of votes, and related to the quota size to which each member is entitled. Multilateral Consultations and quota changes are issues on which there is a great deal of activity at the moment, but there are as I said before other aspects of this Medium-Term Strategy, where changes are progressing more gradually, but which are also very important. Let me just mention two of them. First, we are revisiting the instruments that we have to help prevent and respond to crisis in emerging market countries. At present, not many of our emerging market countries' members are borrowers of the Fund. This is partly a reflection of good conditions in the global economy and financial markets, and also clearly partly of improved economic management in emerging market countries. But we need to make sure that if world financial conditions worsen we have the tools we need to support emerging economies.

Another example of other activities in the Medium-Term Strategy is certainly our commitment to low-income country members, and the international effort to reduce poverty. Our work is to improve our effectiveness by focusing our efforts more sharply on the areas of responsibility, macroeconomic and financial issues, in which we believe we have a comparative advantage, and also to have a cooperative approach with development banks, starting with the World Bank, to face what is really an important challenge for many low-income countries to meet the development of the Millennium Development Goals.

Now let me make some brief reference to how we see these issues of medium-term changes in the Fund related to Japan, and at the same time make some reference to how we see also the economic developments and prospects in this country. Our Article IV consultation with Japan was concluded only a few weeks ago, and the board discussion was last week, and I have to say that developments recently have been really encouraging in Japan. Deflation has by most measures ended, and we project that output growth in Japan will be close to 3% this year, with employment rising and financial and corporate sectors in their best shape in over a decade. The Japanese economy and the Japanese people have been though some very difficult times over the past decade, but that we believe is a moment that has been left behind.

Nevertheless, despite this strong momentum, we see some important challenges for the Japanese society in front of us. The most pressing challenge is regaining sustainability in the public finance. Thirteen years of deficit have left a legacy of uncomfortably high public debt, and this leaves Japan ill-positioned to address the future demands on the public budget from an aging society. Another important challenge for Japan is to lift potential growth, and this is necessary to safeguard living standards with a shrinking population, and it calls for far reaching reforms to support productivity, and last but not least, the Bank of Japan faces the challenge of implementing a post-deflation monetary strategy to support sustainable non-inflationary growth.

The International Monetary Fund believes that the Japanese authorities are broadly taking the right approach to the budgetary issues facing Japan. The government has put in place a plan for fiscal consolidation and is ahead of schedule in implementing it. They have also offered the outlines of tax and expenditure measures to meet the objectives they have set for themselves. From this we believe that there is a case for somewhat more ambitious and front-loaded adjustment to take advantage of the recent upswing, to set the debt ratio on a declining path, and to allow more room for maneuver in the future. We would also urge policymakers not to be overoptimistic of what can be achieved through expenditure cuts and to take a balanced approach to fiscal adjustment using tax and spending measures. The Fund's economic analysis suggests that a balanced approach will also produce the biggest output gains over the medium term.

As regards a strategy to lift Japan's long-term growth prospects, the government has a comprehensive reform program, and much progress has been made to date, particularly in charting a path to privatize Japan Post and restructure other government financial institutions. In our opinion, policymakers should continue to be ambitious in structural reforms. Given the aging population, it is especially important to take steps to encourage participation by women, marginalized youth, and older workers in the labor force. There is also scope for further product market reform, including deregulation of services and for liberalization of agricultural trade. Experience, for instance, in Western Europe that is facing very similar structural problems shows that gains from labor market reform are enhanced when it is undertaken in conjunction with product market reforms.

Finally, turning to the requirements of monetary policy in a post-deflation environment, the tightening cycle started in mid-July to return to more normal level of interest rates, and that cycle needs to be gradual, in our opinion, since the risks of a surge of inflation are limited for now, and a recurrence of deflation would be very costly. The Bank of Japan is to be commended for adopting a new framework that helps anchor inflation expectation and brings to the fore what Mr. Greenspan, for instance, described as a "risk-management" approach to the conduct of monetary policy. Careful attention to the longer-term risks of financial or macroeconomic imbalances can help forestall the recurrence of highly disruptive events like the asset price bubble in the 1980s. It will be important that implementation of a new framework be accompanied by clear communications by the Bank of Japan, and here, also, I want to commend the communication strategy of the Bank of Japan up to now.

The International Monetary Fund's relationship with Japan is very important. Japan is the Fund's second largest individual shareholder, and the interventions of Japan's representatives at the Fund are listened to with great respect, both by us, by the staff, and by the other members. As the largest economy in Asia and a very substantial contributor to low-income countries, both directly and through its support of the Fund's lending and technical assistance, Japan also has a hugely important role in many policy initiatives. I believe that this full and rich participation in the Fund and in the global economic community also conveys important benefits for this country, increasingly so as real and financial globalization make the world more integrated.

Multilateral Consultations are very important in this context. As a major participant in the world economy, Japan has much to gain from an orderly resolution of global imbalances. Japan, along with other countries, has also a key role to play in contributing to a smooth resolution of global imbalances, and that is why Japan is participating in Multilateral Consultations. Structural reforms to boost domestic demand in Japan would contribute to a lowering of the current account surplus as well as increasing growth. The gains will be even greater if actions by Japan are part of an agreed strategy including fiscal consolidation in the United States, greater exchange rate flexibility in emerging Asia, and rebalancing growth in China through more private consumption, and certainly enhancing growth potential in Europe.

As an important participant of the global economy, Japan will also benefit from better focused Fund surveillance, including a greater emphasis on financial markets. Japan is a major player in emerging markets, and certainly will benefit from our capacity to prevent and respond to financial crises. And the very important role of Japan as a major aid donor will be benefited by a more focused approach by the Fund to the challenges of low-income countries. I just wanted to make clear that this change in the strategy of the Fund or this update of the strategy of the Fund regarding the challenges of globalization has implications for every country, and I described very briefly the ones I see for Japan.

I want to end my remarks before I take your questions by thanking Prime Minister Koizumi, Minister Tanigaki, and Vice-Minister Watanabe, and also Governor Fukui for their hospitality. I also want to say again to your Club, thank you very much for your hospitality.

MR. SLOAN: Thank you very much, sir. At this moment, we will open up the floor for questions from our working press as always. We do have translation today, so we want to make sure that everyone identifies themselves, and then we will proceed directly to the answer. Try to limit yourself to one question after identifying yourself, and no speeches. Our first question. Yes, sir.

QUESTION: I would like to ask you, sir, you mentioned the global imbalances, the US deficit, and Japanese and Chinese surpluses. How exactly should those imbalances be addressed, resolved, or tempered?

MR. DE RATO: I think the surpluses are not only in Asia, but also very strongly in oil-producing countries, especially in the Gulf. But what is clearly needed is a rebalancing of demand in the world economy. We see the need for the United States to increase its savings ratio, and to come to a more sustainable path of expansion. At the same time, we see the need for stronger private consumption in China and a decrease in the expansion of investment. We see in other parts of emerging Asia the need for bigger investment to recover the levels of the end of the 1990s. We see the need for bigger investment in social and infrastructural projects in many of the oil-producing countries, certainly in the Gulf, and we see the need for Japan to implement some of the changes just put forward, in which, probably, stronger domestic growth will reduce part of the surplus.

That rebalancing of demand, first of all, cannot occur immediately and probably should not, but will allow the world economy to go from a model of growth based on the very strong expansion of the US at the cost of a very reduced savings ratio and a very strong expansion of China based significantly on exports and investments, to more sustainable patterns of growth in those two countries, and at the same time, with some other new edges of growth. What has happened in Japan in recent times is a very good example of what is needed, and I think that we are seeing some encouraging signs also in Europe. Certainly, the plans of the governments to increase investment are also welcome in this respect. Certainly, this rebalancing of demand needs for market forces to be more freely allocating resources, both in surplus and in deficit countries. One instrument—but certainly an important one at that—is exchange rate regimes that will allow economies to adapt both to external shocks but also to allow the monetary authorities to have a more efficient way of controlling inflationary pressures.

MR. SLOAN: All right. Next question.

QUESTION: Mr. de Rato, you mentioned the need for improved surveillance and crisis prevention and other measures. Here in Asia, of course, a number of moves toward monetary integration are taking place, including regional surveillance mechanisms and there is the Chiang Mai Agreement which is constantly being increased in size and being multilateralized to some extent. I wonder how you see these initiatives here in Asia; the prospects for them meshing smoothly with the activities of the IMF, if you like.

MR. DE RATO: We see them with a lot of support and encouragement. In fact, we have been co-participants in more than one meeting about financial integration in Asia. We believe that Asia will benefit from financial integration. It will make the Asian economies more relevant in world markets, and it will give Asian societies better instruments to use their own financial resources and savings ratios. In that respect, we see a clear agenda of Asian integration in financial terms. That, of course, requires a lot of different steps in different places, and the Fund is engaged in that process. We see that as an important step in making Asia a more resilient area, and that of course given the importance of the Asian economy in the world economy, is not only good news for Asia but it is also good news for the world economy.

MR. SLOAN: Next question, please.

QUESTION: Could you comment about the trend of rising interest rates around the world? In the latest report, it seems that the Fund is inviting the central banks to be cautious and conscious to keep rising interest rates. Is that a graduation on that, it seems like you are inviting the European Central Bank to more than the BOJ or the Fed to show restraint.

MR. DE RATO: It depends on places. Certainly, first of all, we would have to be aware that in world terms, we have lived through a substantial monetary expansion. Very important economies, in some cases for different reasons, but at the same time, have lived through very low interest rates policy and very substantial liquidity injections in the world economy: the United States with a very low interest rate policy up to 2004; the Bank of Japan with a very low interest rate policy until last month; and even the European Central Bank. That has certainly contributed to a very extraordinary growth pattern of the world economy, but I want to remind you that we are coming to the fourth year of almost global expansion, and with the prospect of 2006 with a stronger global growth than 2004, and good prospects to 2007, even in an environment of extremely high oil prices and commodity prices, not only oil prices. So in one term, what the world needed was to move to more sustainable monetary policy, and that is what has happened in the United States, what is happening in Europe right now, and what is happening in Japan. That, of course, is good news because monetary expansion is an economic tool that cannot be abused. We do not want to come back to inflationary situations that will limit world expansion.

At the same time, the combination of strong growth through many years, in many cases with very low spare capacity and high commodity prices, not the least, oil prices, demands for monetary authorities to be vigilant. In fact, we are seeing that around the world with different countries increasing monetary policy as a preemptive action to limit inflationary expectations. From Chile to South Africa to Central Europe to Indonesia to other places, I think monetary authorities are doing a very credible job in making it clear that they have a mandate they are going to use to guarantee price stability. I think all of that has to be seen as a show of better policy implementation than maybe 10 or 15 years ago, and we have all to remember that inflation is probably the biggest risk for expansion, both at the national level and the global level. In that respect, we should be aware first, that we are moving into a more sustainable, or if you want to call it a neutral monetary policy in the main economies, and second, that we are facing certain threats to inflation because of oil prices, oil spare capacity. That has to be especially looked at by central bankers.

Of course, things are different in different areas. Japan is coming out of a very long deflationary period. The European Union did not have that problem but is also facing the need to increase its room of maneuver in monetary policy. What we advise central bankers is first of all to be very vigilant with inflationary expectations, and at the same time, be aware of the reality of inflationary pressures in each economy which are not the same. I think that is what reflects in our advice to different central bank authorities around the world.

QUESTION: You talked about the meeting in Singapore next month and the prospective changes regarding some Asian countries as far as the relative quotas and voting shares. Could you give us some more details about what the IMF favors or you personally would like to see done? Which countries are we talking about and what will be the significant changes?

MR. DE RATO: Well, I do not think I can yet give you anything more specific because first of all, we will have to have a discussion of the Board of the institution at the end of August to fix the details. But what I think is feasible right now and acceptable for most member countries, if not for all, is a two-year program in which we will address the need for rebalancing quotas for more dynamic economies and to do that more than once. To update our formula, we have a formula to calculate economic weights that is probably not transparent and inefficient and that does not support the credibility of the membership and at the same time, to introduce changes that will make rebalancing an easier instrument to do. In a world in which emerging markets are changing so quickly and an institution in which political weight is related economic weight, rebalancing has to be an easier process up to now. At the same time, although the Fund is a financial institution in which capacity is linked to economic and financial weight, there is clearly a need to recognize that low-income countries need to have a fair voice. To do that and to protect that, we have to go back in a policy of eroding basic votes that have been occurring for the last decades and at the same time, not only go back in that process, probably targeting doubling basic votes at Singapore but also introduce a mechanism by which basic votes would be protected in the future.

This is as you can see, an ambitious and I think broad program that will require different actions along the way and that my idea is that the governance will accept it and make a specific backing of it at Singapore and that in the next two years, it will implemented by the Board and by management as to be completed in two years' time.

QUESTION: Just following on to that, I wonder if you could tell us what actual impact the recalibration of the quotas or the voting rights will have on IMF policy in terms of lending or decision-making to se a significant impact.

MR. DE RATO: No, I do not think the question is that the institution will change its views. The mandate of the institution is very, very concrete. It is a matter of economic and financial stability. I think all our member countries, developed, emerging and low-income countries, agree that macroeconomic stability is a public good that is in the interest of all of them to be preserved. But, nevertheless, even if there is an agreement on that, there is clearly the need for the legitimacy of the institution that countries are represented at the level of the Board in relation to their economic weights.

This is a quite unique institution. We have a lot of multilateral institutions in the world regarding political issues, security issues, trade issues, labor issues but this is an institution in which countries have the obligation to submit themselves to a yearly surveillance of their economic policy. You do not have that in security or in political terms. In that respect, legitimacy is very important. The fact that the check of each economy also goes through the Board and allows the rest of the world economy to have a discussion about each and every single economy of 184 countries makes, I think, a very unique process and procedure. That is, I think, very helpful but at the same time, it is quite unique, as I said. That allows us, for instance, to face now Multilateral Consultations, I think with a strong experience. That is why I think that it is important, not so much to change the direction of the institution but to give it stronger credibility that the most dynamic economies get the representation that the real economic weight represents in the world economy.

QUESTION: My question is about Prime Minister Koizumi's structural reform in the past five years. There is now a growing voice among the traditionalist conservative Japanese politicians that our structure reforms in Japan went too far too quickly in the past five years. I mean, deregulation of the private sector created drastic change of social contract-like relationships between companies and employees and the collapse of local community and so on. Some people, some politicians say we should not accelerate the pace of deregulation for the time being and we do not have to stop, rather we should give a second thought about the speed of the structure reforms. But, in the meantime, some economists say we should not stop; we should accelerate the structure reform in Japan. Which idea do you think is correct and do you agree with the argument by conservative Japanese politicians?

MR. DE RATO: I think that Japan was facing a very difficult situation a few years ago with a very long and unprotected and protracted crisis of more than a decade. It is very difficult to argue that the strategy to get Japan out of deflation was an incorrect one. The cost of deflation is actually bigger than any other cost in terms of not only the economic, macro-economic circumstances but social circumstances and expectations of the population. I think it is very difficult to argue that Japan needed a bold strategy and I think it has been a successful one. I do not think anybody should complain about being out of deflation in Japan. The combination of the aging population with the long deflationary situation would have had tremendous costs in the future of Japan.

Now, Japan is a more normal situation but it has to face other issues. The debates that you describe are not unique to Japan. I mean, you have that in most developed economies. That has to do also with globalization. As I said before, one of the reasons to put forward in Medium-Term Strategy of the Fund was my belief that globalization is challenge not only for emerging and low-income countries but also for developed economies. In Europe where I come from, I have found very surprisingly that some developed economies were not aware that globalization was also not only an opportunity but a challenge for them.

Globalization requires changes. Of course, changes have to be homegrown. I totally believe that economic policy has to be related to social—if you want to call it social contract, but at least, a social understanding of various societies. It is no use to try to explain a society that others are doing something if they do not want to do it. But at the same time, I think more than in a grown-up society has to be aware of the trade-offs. Economic policy is a constant trade-off. Every measure has a trade-off. If you do it now, if you do it later, if you do it more forcefully, less forcefully, there is no one single measure that does not require you to trade-off with something else.

Japan has, in our opinion, a clear agenda for the future. Certainly, it is too good to consolidate the growth—to enhance growth potential and to do that, structural reforms are needed to maintain a clear and credible monetary policy and to address fiscal consolidation with a broad mixture of measures. Fiscal consolidation is much easier if you grow at 3% than if you grow at 1%. Everybody knows that but sometimes, politicians act like they did not know that. If you have to grow at a little higher, stronger, you need to let market forces be more competitive. You need to have newcomers into the economy.

All over the world, you listen to these arguments that say "let us protect the actual economic forces." That is very sensible; I do not have anything to say against that, but not at the cost of the newcomers because the strength of the future jobs usually lies on the newcomers into different sectors. In that respect, letting market forces determine more dynamism is key for the future of society. Then, you have to balance that with different social and economic aspects. You have different models of labor reform; you have different models of structural reform; but what is clear—and I put the example of Europe in my speech—is that if you want to increase labor utilization, you have to give better opportunities to employers and at the same time, you have to have a flexible labor market that will guarantee that employees will get the better opportunities and certainly, you have to a product market that would create new opportunities.

The experience is that if you combine labor reform with product market reform, you have a much better chance of succeeding than if you just do labor reform without product market reform in which case, a lot of the gains goes to the already-established companies who will do the same at less cost. But not with normal competition and that is not the type of outcome that I think is more suitable for a society like Japan.

MR. SLOAN: For the timekeeping, we have about 15 minutes left. We will conclude right at 17:00. Our guest has kindly agreed to stay around to take questions informally up front for about 5-10 minutes immediately afterwards but we will conclude at 17:00. So, any Japanese journalist who would be in need of translation, now is the time to do it.

QUESTION: Could you tell us a little bit about a proposed financing facility for emerging markets that could face unexpected financial crisis? How that would be different or how the IMF could learn a lesson from the contingent credit lines that kind of fail, but would kind of expire without anyone really using it? Thank you.

MR. DE RATO: Well, crisis prevention is a very important tool and it can be even a very cheap one because avoiding crisis is probably the best that we all can do, especially financial crisis in a globalized world. Of course, crisis prevention is sometimes not very easy to measure because if you are successful, well, you prevent crisis so there is not very good measures to know exactly how successful you have been. What we see clearly and we need to discuss that among the membership is that in a world of globalized financial markets and in a world in which emerging economies are more and more benefiting from private financial markets, future crisis will probably be different from the actual ones that we know.

We believe that emerging economies, even with strong macro-economic fundamentals, in many cases still have vulnerabilities that can become very risky in a sudden turn of market appraisal of risk. We have lived through a very substantial change in the appraisal of risk in the low direction.

Just to give you an example that affects the Fund, it is true that 2006 is the lowest moment in the last 25 years regarding financial problems, but 2003 was the highest. So things can change very quickly; in this sense for the better, but we should all be vigilant that changes in the financial markets do not occur in a way that the actual situation is reversed again.

We believe that the best crisis prevention is good macroeconomic policy. There is no better crisis prevention than the home-grown crisis prevention. Building up reserves is then a strategy, but it is not a free-ride strategy; there are costs in building up reserves. Pooling arrangements, regional compromises, commitments are all part of a view in which you can see different levels or ladders of protection; but if you face a substantial crisis, you might need international reaction and that is the International Monetary Fund.

As you mentioned, the CCL never had any customers, because it had a problem of a stigma. Countries understood that adopting the CCL was like sending a message to the markets of "I expect a crisis." So we have to avoid that. I think we have to sit down with member countries, both possible lenders and possible creditors, and discuss to what extent the actual configuration of our instruments is sufficient, to what extent some emerging economies that have strong fundamentals require or need instruments that will send the right signals in terms of automatic response, in terms of front-loading. That is a debate that we have already started, but I do not think it will end very quickly; I think that we will need time to discuss it, and we will need time to appraise what is a very substantial change in the role in interaction of financial markets with the emerging economies.

I think that it is a very positive change, but at the same time, not only has there been a change in the relationship between financial markets and emerging economies, with the fact that private markets are willing to finance today economies that they were not willing to finance only three four or years ago, but it is also a substantial change in the depth and nature of financial markets themselves. I think all that requires a better understanding of the linkages and leverages in the new instruments in financial markets. That is why at the same time that we want to discuss crisis prevention, we should also deepen the knowledge of the Fund and interaction of the Fund, and the understanding of the Fund and financial markets.

MR. SLOAN: At this moment, I will open the floor to all our guests today. I see we have some distinguished former central bank officials, as well as foreign members of the IMF. If I do not get a hand raised, I will throw one out right now. Yes, sir, at the back.

QUESTION: The other day I was watching TV, and I heard Mr. Shimada Shinsuke, who is a TV celebrity who makes people laugh; he was saying that Japanese people should never have their savings in Japanese yen any more, but in dollars and euros and maybe other currencies. I am no expert of economics or macroeconomic policies, but would you please tell Japanese whether what he was saying was funny, or was he serious about it?

MR. DE RATO: Well, you should ask him. I do not know this gentleman and I am sorry, because if he is that funny I would really like to see him. I think that the Japanese economy and the Japanese currency is a very strong one and it represents a very strong economy; so I think that the yen is clearly one of the world currencies. I think in terms of the world, it is very important that we have strong global currencies and certainly the yen is one of them.

MR. SLOAN: Actually, this week a member of the Central Bank board seemed to indicate that after the July interest rate hike, that perhaps Japan might make a move again in the current calendar year as well. Based on the recommendations of the IMF, your own growth forecast, do you think that such a move would be appropriate, if you are willing to comment on that? And would it, if it happens, be something that would then require the Fund to look at its growth forecasts and perhaps tweak them down?

MR. DE RATO: First of all, I want to say that the Bank of Japan is a very respected institution and it has proven to be capable not only of facing a very difficult task of reducing or rooting out deflation but also changing monetary policy in a very smooth manner in quite unique circumstances. So I think that the Japanese society should be proud of their institution and the communication of the institution. What we have said in our appraisal of the Japanese economy is that we do not see right now the risk inflationary pressures in Japan; so in that respect, monetary policy should be vigilant but should also realize that we do not see inflationary pressures. But if the case will be that the Japanese Central Bank will perceive inflationary pressures, there is no doubt they should act. It would be not in detriment, but it would endanger sustainable growth in Japan. But I think it would depend on the data, and as I said before, we do not see right now signs of inflationary pressures building up. Once we have moved into a more normal framework of monetary policy, in which the Zero Interest Rate policy has been abandoned and the quantitative easing also...

MR. SLOAN: We have time for about one more question.

QUESTION: I have a follow-up question to what Dan just asked. You talked about more neutral policies in the States and Japan. In that case, how much more credit tightening do you think you need in Japan? For example, it is just 25 basis points now. How many more times to see more neutral interest rates in Japan? Also, if it is true that, like the Bank of Japan says, the Japanese public's inflation expectations are low, does that mean you have to raise more aggressively before, for example, the CPI hits 1%?

MR. DE RATO: Well, I will try to say that same as I said in response to the same question; you have asked me the same question with another title. We do not see inflationary pressures in Japan right now. In that respect, monetary policy should reflect inflationary risk. We do not see either inflationary expectations. So I think monetary policy in Japan should follow that, and I will have strong confidence in the capacity of the Bank of Japan to do that. Once the Bank of Japan will establish a reference of price stability, that would also help from the point of view of communication. But I think that given the challenges that anybody will have foreseen for the Bank of Japan only six month ago, and the way those challenges have been addressed, I think we can all be comfortable regarding the capacity of the bank to address inflationary questions. Thank you very much.

MR. SLOAN: We would like to thank our guest today. He has visited for the first time in two years, but indicates that he comes to Japan once or twice every year. As we do for all our guests, we are offering you an honorary membership at our club for one year, and we hope to see you again very, very soon.

MR. DE RATO: It was a pleasure. Thank you.