Nikkei Symposium Keynote Speech
By Christine Lagarde, Managing Director of the International Monetary Fund
Tokyo, Friday July 6, 2012
Good afternoon. I am delighted to be back in Tokyo. I would like to express my deep appreciation to Mr. Tsuneo Kita, the President and CEO of the Nikkei corporation, for hosting today’s event. I am also very humbled by Finance Minister Azumi’s warm introductory remarks.
Coming here, I always feel welcomed by the warmth, hospitality and generous spirit of the Japanese people. But this visit takes on added significance.
This year, we mark a very special occasion. We celebrate sixty years of Japan’s partnership with the International Monetary Fund. Throughout those sixty years, Japan has been a firm friend and committed partner of the international community.
Through our journey together, Japan’s actions have always been imbued with a spirit of community, a spirit of giving, and a steadfast belief in the power of multilateralism.
Today, in the face of the worst global financial crisis since the Great Depression, this spirit is needed as never before.
Here, the words of Haruki Murakami are inspiring: “If we have any hope of victory at all, it will have to come from our believing in the utter uniqueness and irreplaceability of our own and others’ souls and from the warmth we gain by joining souls together.”
In October this year, Tokyo will host the 2012 Annual Meetings of the IMF and World Bank—where the global community will come to address the world’s most pressing economic challenges. The collective spirit should guide us toward recovery.
The Japanese spirit of ‘kizuna’(絆)—demonstrated so well following the tragic Great East Japan earthquake and tsunami—symbolizes what the world needs more of today.
With this in mind, let me talk about three things this afternoon:
First, the main challenges facing the global economy;
Second, how we must cooperate more to meet these challenges;
Third, Japan’s role as an indispensable member of the global community.
I. The Main Economic Challenges of our day
Let me begin with the issue of primary importance: the global economy’s ongoing effort to break free from the shackles of the financial crisis.
Over the past few months, the outlook has, regrettably, become more worrisome. Many indicators of economic activity—investment, employment, manufacturing—have deteriorated. And not just in Europe or the United States. Also in key emerging markets: Brazil, China, India.
In the IMF’s updated assessment of the world economy, to be released ten days from now, the global growth outlook will be somewhat less than we anticipated just three months ago. And even that lower projection will depend on the right policy actions being taken.
Certainly, some extraordinary efforts have already been made. I am thinking of Europe. The ECB has taken steps to ease bank funding pressures and the European financial safety net was expanded. And, just last week, European leaders agreed to significant steps in the right direction to address the immediate crisis, which is encouraging.
That said, further progress will continue to be needed to overcome the crisis decisively and avoid the damaging effects on stability and growth. Not just in Europe, but across the globe.
For make no mistake: this is a global crisis.
In today’s interconnected world, we can no longer afford to look only at what goes on within our national borders. This crisis does not recognize borders. This crisis is knocking at all our doors.
And there are risks in all corners of the globe—Europe, the United States and, here too, in Asia and Japan.
Certainly, Japan and the region have coped remarkably well so far. Since 2008, Asia has contributed more than half of total global economic growth.
But this does not mean that Asia is immune.
The spillovers from Europe are increasingly visible here. Lower stock prices, capital outflows, and higher spreads have already affected a number of Asian countries.
For Japan, two risks are of primary concern:
Upward pressure on the yen from the continued flight to safety would be an unwelcome hurdle to Japanese growth.
And, with a large share of your exports destined for Europe, a deeper crisis there would take its toll on growth.
So, just as those in the midst of crisis must work to rise above it, others must work to guard against it. No-one is immune.
II. Solutions Through International Cooperation & Partnership
Which brings me to my second point: to be effective, solutions need to be grounded in cooperation.
What does that mean, practically?
IMF research indicates that a coordinated strengthening of policies across the G20 countries could raise global GDP by 7 percent, and boost jobs by 36 million over the medium term—at a time when global unemployment has reached crisis proportions.
As Aristotle put it: “The whole is greater than the sum of its parts.” Today, more than ever, the world needs a vision of ‘the whole’.
The idea that collective policy action will benefit all—as reflected in the G-20’s Mutual Assessment Process—is something the IMF has advocated for some time.
Indeed, an increasingly important role for the Fund is to lay out the interconnections between countries and indicate how policies in one country affect others—our “spillover” analysis.
Recently, we have seen examples of countries taking account of those connections, within and across regions. Policy coordination in practice, if you will.
The actions taken most recently in Europe, for instance. Last week’s European Summit puts in place the first building block of a banking union—a unified supervisory framework. Yes, other elements are needed and there will be hurdles to implementation. But there is no question that pushing ahead with these coordinated actions will help restore longer term confidence in the Euro area.
And here in Asia too, there has been renewed commitment to this region’s unique brand of collaboration: the recent doubling of amounts available under the Chiang Mai Initiative Multilateralization and the decision to broaden its use for crisis prevention.
These are important steps toward the ultimate goal—lasting stability and growth, shared stability and growth. Achieving that goal will require coordinated action to break the main chains of this crisis: weak sovereigns, weak banks, and weak growth.
We must break all three.
First, restoring sovereign strength.
Countries must deal decisively with the issue of public debt. For too many advanced economies, it is pressing heavily on growth.
Deficit reduction is essential—and for those countries facing market pressure, there is no alternative but to do it now. For others, however, adjustment can be more gradual and at a pace that does not undermine recovery.
The United States, in particular, must do all it can to avoid driving over what some have described as the ‘fiscal cliff’. This refers to the expiring tax cuts and automatic spending reductions that are legislated to begin next year and which would abruptly shrink the budget by some 4 percent. This would jeopardize not only the US recovery, but the global recovery.
In Europe, as I mentioned, we must continue to build on the important steps that have been taken. In particular, fiscal cooperation must reach new heights.
And even where countries can go more slowly with fiscal adjustment in the short term, the path must be grounded in credible medium-term commitments to reduce public debt. This is a priority for the US, Europe, and here in Japan as well.
In this respect, the recent passage of the consumption tax bill by Japan’s Lower House is a very positive step—and it is critical that it be implemented as planned.
Second, repairing and reforming the financial sector.
As well as restoring the health of sovereigns, we also need to restore the health of the financial sector: back to supporting, not destabilizing the economy; back to function, not dysfunction; back to service, not just profit.
Again, we must keep our eyes on the main goal: we need financial institutions that are healthy enough to deliver the credit our economies need to create growth and jobs.
Certainly, there has been progress. The agreements related to the Basel III framework is one example. The important steps taken by the Financial Stability Board are another—including spelling out the details on issues related to systemically important financial institutions and OTC derivatives markets.
Financial sector reform is an area where Asia has been ahead of the curve. As a result, bank balance sheets are much healthier than in many other parts of the world. In fact, regional banks have been able to step in and make up for the exit of some euro area banks in Asia.
But the progress in Asia aside, if we were to ask is the global financial system safer today than it was pre-Lehman? My answer is “not yet.”
I will not go into the details here, but the IMF has laid out what we think needs to be done: better regulation, stronger supervision, and proper incentives for the private sector. And all of this needs to be coordinated across institutions, markets, and borders.
Third, sustained growth.
So we need sovereign and financial health to get the growth engine turned back on. But to carry the spark forward, the G-20 goal of strong, sustainable and balanced growth is essential. And, I would add that it needs also to be growth that is inclusive and that creates jobs.
Structural reforms are key to this—across the range of labor, product, and service markets. The programs the IMF supports includes such reforms and includes—as appropriate—close dialogue with social partners, including trade unions.
Asia, of course, has managed to maintain the momentum of growth—despite the global crisis. In fact, Asia has been leading the global recovery.
The region has done this through sustained reforms that have, among other things, restored the health of the private sector. Debt-to-equity ratios have fallen by two-thirds over the past decade, resulting in stronger corporate balance sheets.
As well as paying attention to its domestic economic health, Asia has a crucial role to play in the global economic rebalancing that is so needed if the whole world is to recover and grow in a sustainable way.
Lower trade surpluses in some Asian countries, for instance, are a promising sign. But the rebalancing that came with the crisis has not been enough. Countries need to continue their efforts to strengthen domestic demand. The shift toward consumption-led growth in China, and improved conditions for private investment in many ASEAN economies are good examples.
Asia’s leaders have recognized that this kind of rebalancing is not only good for Asia, but also good for the world. At the same time, they recognize that growth should not just be rebalanced, but more balanced.
The issue of more inclusive growth is on the minds of Asian policymakers—as it is for policymakers all over the world. Progress on this front—say, through more spending on social safety nets or strengthening financial inclusion—can help to improve the quality of people’s lives and boost domestic demand. It is a win-win strategy for Asia and the world.
III. Japan’s Role in the Global Community
Which brings me to my third main point—the role of Japan in the world.
You know better than I about the enormous challenges your country faces—the continuing recovery from the tsunami is one. The aging of the population is another.
And yet, there is tremendous growth potential in Japan as well.
Here, I cannot help but note that you have a wonderful resource in the largely untapped pool of well-educated female workers. Increasing their participation in the workforce to levels common in most other G-7 countries, would increase Japan’s potential output by 25 percent by 2030. This is just too good an opportunity to miss!
Japan also has the advantage of being in a fast-growing region. Here, your membership of the Trans-Pacific Partnership will help strengthen Japan’s integration with Asia and, also, catalyze reforms at home.
This partnership illustrates Japan’s tremendous spirit of community—both at the local and global level.
When your fellow citizens needed you most, you stood by each other.
The Great East Japan earthquake and ensuing tsunami caused human and structural devastation on a scale that is almost beyond comprehension. I have been struck by the heroic community response and the amazing adaptability of the Japanese people.
Losing more than a quarter of the country’s electricity generation would have driven many economies into the ground. But, last summer and again this year, the Japanese people have gone to amazing lengths to conserve energy and keep the economy moving forward.
People are working weekends, so factories can run at ‘off-peak’ times. People have turned off air conditioning and instead opted to dress in ‘cool biz’. This sort of self-sacrifice that I cannot imagine happening in many other countries.
Together with the strong implementation of reconstruction spending, Japan’s economy will turn around. “Ganbarou Nippon” (がんばろう日本)!
And, when the global economy faced its darkest hours, you stood by your fellow global citizens.
Twice now, in recent times, Japan has stepped into the breach. In 2008 and again this year, Japan was the first to offer loans to boost the IMF’s resources and help stave off an even more dire global economic collapse.
Japan’s leadership in the recent decision by member countries to increase the IMF’s resources by $456 billion is especially important. It allows the IMF to stand behind all its members and meet the needs of all those affected by the crisis.
In the face of common dangers, when others might retreat or pause, Japan’s first response is always to ask “How can we help?”.
Even when faced with challenges at home, Japan has taken the global view, the noble view.
As steadfast believers in multilateralism, your partnership has been invaluable to the international community. Be it through ASEAN Plus Three or APEC, or as part of the G-20, the world has come to depend on Japan’s global citizenship and its deep support for international cooperation.
In this same spirit, Japan has been a generous and consistent supporter of the IMF.
Japan has contributed more than any other country to the IMF’s concessional lending to the poorest countries, including in Africa.
Japan has contributed more than any other country to support the Fund’s technical assistance and capacity building efforts in more than 120 countries—contributing more than $400 million since 1990.
And Japan has also been a leader in its support for young people through the IMF scholarship program, which has benefited more than 660 students.
Finally, let me also note that Japan is well represented at the most senior levels of our institution. One of our Deputy Managing Directors, Naoyuki Shinohara, helps me steer the IMF in its daily operations. I value his wisdom, his judgment, and his cool temperament—all of which I associate as quintessential Japanese traits!
Conclusion: Japan’s Partnership with the IMF
Let me conclude: in times of crisis, the risk is that nations are driven further apart. We must use our growing global interconnections to come together.
At the Fund, we recognize that our governance structure must reflect our membership. In that respect, the package of so-called ‘quota’ reforms agreed in late 2010 will ensure just that. In fact, once these reforms come into effect, three Asian countries—China, India, and Japan, of course—will be among our ten largest shareholders.
Asia’s voice, already strong in the IMF, will become even more powerful.
In that vein, this October, the world will come to Asia—to Tokyo—for the IMF Meetings which you have so generously agreed to host. All eyes will be on Japan as we seek to find global solutions to global challenges.
The whole world will be looking to Japan’s leadership, spirit, and commitment to multilateralism—at a time when the world needs these qualities, and needs Japan, more than ever before.
On behalf of the IMF, I can say that I will be immensely proud to be here—and to stand shoulder to shoulder with our Japanese friends.
Thank you. (ありがとう.)