TOKYO, 5 June 2003 — The International Monetary Fund’s First Deputy Managing Director Anne Krueger yesterday welcomed the launch of a new regional fund by 11 Asia-Pacific nations, by saying it could strengthen the region’s financial system. “It looks as if the Asian Bond Fund is an effort to increase the scope and depth of the markets within some of the Asian countries that’s a welcome development from our viewpoint,” IMF’s No. 2 official said at a Tokyo news conference.
“We’re more and more appreciating that if you rely too heavily on any one kind of instrument such as bank financing, your financial system is more fragile than if there are a variety of markets that can be integrated and are interlinked,” she said. The $1-billion fund is to be set up by the 11 economies in a joint bid to promote bond markets in the region and channel official reserves of Asian economies back to the region.
During the press conference, Krueger also urged Japan to adopt a medium-term inflation target in an effort to fight against deflation. “Strengthened efforts to end deflation are required,” Krueger said. “A medium-term inflation target combined with clear communication of the strengthened strategy would help convince the public that deflation will end, and encourage spending.”
Adopting an inflation target means the Bank of Japan would aim for a specific level of consumer prices within a given period. Krueger specified no range, saying only that “any positive magnitude or range would clearly enable the situation to improve”. In a way to end falling prices, she recommended that the BoJ purchase a wider range of assets, including foreign assets, to “allow monetary policy to act more directly through asset prices, as well as by expanding liquidity”. Krueger was in Japan since Tuesday for a two-day visit for the IMF’s annual bilateral discussions with member countries on their economic developments and policies.
Japan needs a “bold and comprehensive policy package” including purchases of foreign assets by the BoJ, and setting a medium-term inflation target to free the economy from its deflationary trap, she said. She called on the government to implement a “bold and comprehensive policy package” of measures which would also include the broadening and acceleration of financial sector reforms to clear up non-performing loans and corporate restructuring.
“We are not focusing only on the monetary,” Krueger said. At the same time, she warned Japan against trying to use the yen’s exchange rate as an instrument of economic policy, saying such efforts were mostly ineffectual. “We would urge extreme caution in any attempt of targeting the exchange rate.
“Using or trying to use the exchange rate as an instrument of policy very seldom can achieve very much,” Krueger said. She hinted at a sense of impatience within the IMF that Tokyo was not moving faster on structural reform.
