Masaru Hayami: The role of Japan amid the changing
international financial environment
Speech by Mr Masaru Hayami, Governor of the Bank of Japan, at the Executive Board of Directors'
Meeting of the Japan Foreign Trade Council, held in Tokyo, on 7 June 2000.
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1. Introduction
Thank you for inviting me to the 263rd Executive Board of Directors' Meeting. It is a great pleasure to
have this opportunity to address such a distinguished audience. It also brings back memories of my
days as one of the Council's Executive Directors and Vice Chairman under Chairman Mimura. Your
invitation today allows me to be here again, for the first time in almost ten years since I left the
Council to become Chairman of the Japan Association of Corporate Executives. Knowing that many
of you come from trading companies which are active globally, today I'd like to share my ideas from
the viewpoint of the role of Japan amid the changing international financial environment.
2. Tensions generated by globalization
Having previously worked for the Bank of Japan for 34 years, I had a chance to work in the then
Foreign Department, our London Office and other positions related to the Bank's international
activities. It was a great experience for me to attend important international meetings such as the BIS
and the then G5 meetings.
Then, two years ago, I returned to the Bank of Japan as Governor. Now, representing the Bank, I have
a chance to again take part in various international meetings. Attending such meetings, I have noticed
two things. First, the number of international meetings has multiplied over the years. In this context, of
particular note is that the presence of emerging-market countries, particularly the Asian economies,
has also increased. One reason for this is somewhat paradoxical in that since the Asian currency crises
of 1997, there is a consensus that the economic and financial stability of emerging-market economies
is crucial for global economic and financial stability. Indeed, the rise in the number of international
meetings and participants evidences the extent to which economies are becoming globalized.
The second thing I have noticed is that various kinds of tensions have arisen as the market economy
has become more globalized. I clearly recall NGO activists surrounding the WTO's Ministerial
Conference in Seattle last December. The IMFC meeting, which I attended in late April on the day
after the G7 Meeting, was also the target of similar protests.
How can it be that the IMF, a pivotal contributor to the development of the liberalized market
economy after the Second World War, and the WTO, a legitimate successor to GATT, have become
the targets of such protests? Perhaps the phenomenon can be seen as a typical example of increased
tension between those who have ridden the tide of the market-oriented economy and those who have
grave concerns about global environmental issues and widening gaps among regions which are
possibly caused by rapid global developments.
I think many agree that the world economy is currently in the midst of one of its most important
turning points since the industrial revolution of the 19th century. Ongoing globalization and
computerization are mega trends which will continue well into the future. In this context, competition
at the global level is expected to intensify. It is global competition which is the principal driving force
behind economic dynamism. No one can stop this trend and we should react positively. However, we
cannot deny the fact that newly formed tensions and uncertainties have emerged. Therefore, we should
continue to look for ways to promote the sound and stable development of the world economy through
steady efforts to establish appropriate rules and regulations that are compatible with the new trends.
One thing is certain, such efforts will be accompanied by difficulties, involving some disagreements
on the international front, and it is incumbent upon us to try to find solutions.
3. Meaning of IMF reform
Against the background of such trends, the international monetary and financial system is burdened
with further responsibilities. In particular, the Asian currency crises brought to the fore various issues
of concern to international financial circles including the prevention and resolution of future currency
crises. And, the outcome of discussions constitutes part of the concept of the so-called "new financial
architecture". The Financial Stability Forum, which was inaugurated last April at the request of the
G7, has published recommendations on such issues as highly leveraged financial institutions (for
example, hedge funds) and international capital flows. This is one example of the fruit of work
undertaken by international financial fora.
The reform of the IMF has been a most important issue. And it was also the Asian currency crises that
triggered intense debate about the necessity of such reform. The Asian currency crises that broke out
as the result of the rapid outflow of short-term capital are called "21st century-type crises". Here, the
IMF has come to be the target of criticism which holds that IMF should improve its surveillance
ability and increase transparency of its policy-making processes because it has not sufficiently carried
out its mission of crisis prevention and resolution. I personally think the problems surrounding the
IMF are deep-rooted and partly reflect its history.
As you well know, the period preceding the Second World War was characterized by such negative
factors as competitive devaluations, restrictions on current account transactions, and the widespread
use of protectionist measures. Without doubt, these had a significant impact on the international
economy and created tensions between countries, only fueling pro-war sentiment. The IMF was
established with the aim of avoiding the repetition of such disruption. The primary concern of the time
was to create a well-structured and crisis-proof international monetary system. For example, fixed
parity between the US dollar and gold (with $1 equivalent to 35 ounces), the adoption of the adjustable
peg system, and abolition of restrictions on current account transactions were key elements
underpinning the Bretton-Woods architecture. Regarding capital account transactions, member
countries of the IMF were allowed to impose some degree of restrictive measures. Therefore, it is fair
to say that more attention was paid to the stable expansion of current account transactions rather than
capital account transactions.
However, things have dramatically changed since then. With respect to the foreign exchange regime,
the so-called "Nixon shock" in 1971 marked an abrupt end to convertibility between the US dollar and
gold, which eventually led to the arrival of floating exchange regimes on a global scale in 1973. And,
capital account liberalization was pursued much more vigorously than most architects of the
Bretton-Woods system envisioned. As a result, the volume of today's cross-border capital flows far
exceeds current account transactions. As I noted earlier, the huge increase in cross-border capital flows
seems to exert a bigger impact than current account transactions on the economic and financial
conditions of individual countries, and, at times, could trigger serious currency crises.
In brief, present conditions surrounding the international financial system are entirely different from
what they used to be when the IMF was created. Amid accelerating globalization and accompanying
rising tensions, what kind of contributions can the IMF make to the stability of the international
monetary system? What should be the core functions of the IMF in this context? These questions are
prime movers behind recent discussions on IMF reform.
The IMFC meeting I attended this April in Washington was previously called the Interim Committee.
But, unlike the Interim Committee, the IMFC is structured as a permanent forum. Thus, the
transformation of the Interim Committee into the IMFC comprises part of efforts to strengthen the
IMF, and it can be seen as a symbol of the current challenges facing the international financial system.
At the first IMFC meeting this April, we had lively discussions on how to reform the IMF. Although
further consideration is needed to reach any realistic conclusions, I believe that some kind of
consensus was formed regarding the future direction we should take in reforming the IMF.
First, we agreed to develop rules under the basic concept of utilizing market functions. In this regard,
the latest G7 and IMFC communiques underscore the importance of involving the private sector in
forestalling and resolving currency and financial crises. At the same time, it was agreed to strengthen
the IMF's role in making various rules that can be applied to new developments in global markets, and
in monitoring the observance of such rules by member countries. Such a role can be considered as
ensuring conditions for proper market functioning are in place, or to correct market failures.
Second, we agreed to review or redefine IMF operations under the basic concept of utilizing market
functions. In this regard, it was suggested that, for instance, IMF lending operations be limited to
short-term liquidity provision to members facing capital account crises. It was also argued that
medium and long-term financial support for promoting development be reduced.
Third, since the IMF has been strongly criticized for lack of transparency in its decision-making
procedures, its accountability should be enhanced in the interest of better governance.
IMF reform has just started. However, it is an important challenge that may determine the future
course of the international monetary and financial system. Japan is the second largest subscriber to the
IMF, following the US. At the same time, Japan is one of the countries most involved in international
financial markets, as witnessed by the fact that Japan is the world's largest capital exporter as well as
largest net creditor. Japan has made various contributions to the formation of a consensus among
international financial circles regarding the direction of IMF reform and it should continue to do so.
4. Role of Japan in a changing international financial environment
(1) What is expected of Japan?
Now, let me clarify Japan's role in this period of changing international finance. First, Japan should
actively participate in developing international rules. The introduction of international standards and
codes involves important elements that determine not only the future path of global economic
development, but which may also have a substantial impact on domestic finance and the economy. For
example, this can be seen in Japan by observing how corporate management is being affected by the
introduction of international accounting rules. In practice, however, to take part in international rule
making is not as easy as it may sound. It requires an enormous amount of knowledge as well as
powers of persuasion. And here we should note Japan's position in the global economy as well as the
role it plays in Asian economies. It is thus desirable that Japan be actively involved in and contribute
to international rule-making efforts with a full understanding of the situation in the region. In this
context, the Bank of Japan seeks to strengthen relations with colleagues in EMEAP (Executives'
Meeting of East Asia-Pacific Central Banks) through more intensive dialogue regarding the regional
economy and finance. Furthermore, Japan is expected to contribute to the process of implementing
rules in Asia through technical assistance in the field of financial system reform and the establishment
of economic and financial infrastructure such as data collection and dissemination systems.
Japan's second role is to directly contribute to the stable growth of the global economy by securing its
own sustainable growth. For this purpose, bringing the economy back to the recovery phase of the
business cycle is an important challenge. Furthermore, it is more important that Japan goes beyond
this by regaining economic dynamism by steadily pursuing structural reform. In addition, as I will
discuss later, it will be a big challenge for Japan to win global confidence in its economy as a whole.
(2) Japan's economy and the role of the Yen
I do not have enough time today to discuss Japan's expected role in a comprehensive manner.
Therefore, I would like to focus my thoughts on one of the important issues regarding the role of
Japan's economy in the global economy and finance; that is "the role of the yen as an international
currency". This issue is also closely related to the point I have just made: how to win global
confidence in Japan's overall economy.
International currency can be defined as "a currency actively used by non-residents as a tool to
measure, to store, and to exchange value". Although non-residents are using the yen, it is perhaps hard
to say that it is "actively used". Rather, it is often argued that the yen is not sufficiently used as an
international currency relative to Japan's status in the global economy. What does this mean?
For currencies to be widely used in a global manner, there are several conditions to be met. First, it is
indispensable to win confidence in the currency internationally. In order to realize this goal, we need a
strong economy supported by a stable currency value.
In this connection, let me briefly describe the current state of Japan's economy. It is becoming
increasingly clear that the economy is improving with support from decisive macroeconomic policy.
In particular, we are observing welcoming signs in private sector demand as evidenced by a continuing
gradual increase in capital expenditures against the background of improving corporate profits. In the
coming period, we will carefully examine momentum of the recovery, focusing on how such recovery
in the corporate sector will spread to the household sector.
Here, I come back to the issue of an international currency. As the second condition for the
international use of a currency, I can point out its "user friendliness". For a currency to be user
friendly, the existence of a liberalized and open economic environment, which includes deep financial
and capital markets, is necessary. Third, the existence of a mechanism by which the creation of an
international network for a currency is catalyzed and accelerated is significant. For example, the global
activities of the shipping, finance, and insurance industries under the British Empire, and then
American multinational firms in the finance and IT industries, respectively accelerated global use of
the pound and US dollar. It may be possible that Japan's contribution to other countries through more
intensive technical assistance will lead to an expanded network for the yen.
In sum, to what extent a nation's currency is globally used depends on confidence in the nation's
economy as a whole. To enhance such confidence, every measure should be taken with the three
aspects I mentioned in mind.
I would like to take up the issue of the Japanese government bond (JGB) market as an example. The
ratio of JGBs owned by non-residents is currently only a few percent, which is extremely low
compared to the US and other G10 countries. This is especially understandable when Japan's
cumulative current account surplus and high savings rate are taken into consideration. However, in
terms of the global bond index, which world bond investors refer to when making investment
judgments, the share of JGBs is the second largest next to that of US government bonds. If the current
budget situation of the two countries remains unchanged for some time, it is possible that the share of
JGBs will become comparable to that of US Treasuries. If so, it is imperative that the JGB market
becomes attractive for international investors.
What is necessary for the JGB market to achieve the global standard? Needless to say, policy
decisions that might impair confidence in JGBs must be avoided. In this regard, budget policy of the
government should be constrained in the long run. It would also be significant to improve the safety
and user friendliness of the JGB market from the viewpoint of such aspects as the usability of futures
and repo markets, the tax treatment of JGBs, and the standardization of trading and settlement
customs.
In my speech today, I have touched upon three conditions for a currency to be internationally used,
namely, confidence in the currency, high degree of user friendliness, and an international network. I
believe that these conditions coincide with the direction that Japan should move in the coming century.
Let me add that every time I refer to the "internationalization of the yen", it carries my strong hope
that Japan will adjust to the new global economic order and contribute to international rule making and
the foundation for sustainable economic and financial development in the Asian region.