Treasury Under Secretary Taylor Recaps Japan Visit

Under Secretary of the Treasury John B. Taylor
Press Briefing
U.S. Embassy - Tokyo

May 13, 2004

UNDER SECRETARY TAYLOR: Yes, thank you very much. Thanks for coming over. I've had a very good visit so far in Japan, and as you just heard, I'm coming here - our team has also visited China. We spent a couple of days in China, and we're going on to Korea, where the Asian Development Bank meetings are taking place, and meeting with people from the Asian region more generally.

It's a good time to come to Asia, to China and Japan, because the economies are doing so well. In fact, the whole world economy is doing quite well right now. The United States is growing very well. Jobs are being created. GDP is increasing at a healthy rate. China is also growing very strongly, and while we're here in Japan, we heard a lot of good things about the strength and sustainability of the Japanese economy.

In my meetings here - which I've had many with the people in the government, who I deal with regularly, but also with the people from the private sector, with economists, with traders - we've learned a lot about what we think is a more sustainable recovery than has existed for a long time in Japan. So it's very good to be here under these circumstances. The policy changes that have been put in place, such as the efforts to ease monetary policy, to tackle the deflation problem, are working. Deflation is receding. The efforts in the banking sector, banking reform, to deal with the non-performing loans, are making good progress, and we discussed that progress with a wide range of participants. So we're really quite pleased about that, and I think with that, I'll just leave it open for questions. Thank you.

QUESTION: Thank you Mr. Secretary. I'm Satoru Suzuki with TV Asahi. In the wake of the latest U.S. employment data last Friday, I don't think you would use the term ejobless recovery' anymore to describe the U.S. economy. Now in your meetings with Japanese officials, how did you characterize the U.S. employment situation, as well as its implications for U.S. interest rates and the U.S. dollar? Did you have any discussions with Japanese officials whatsoever, regarding how the U.S. and Japanese treasury officials would respond to a possible interest rate hike by the Federal Reserve this summer?

TAYLOR: We did talk a lot about the strength of the U.S. economy and the Japanese economy, the two largest economies in the world, at this point two substantial engines of growth, the strongest engines of growth in the G7 working together. We talked about how that is important. One feeds on the other. The Japanese recovery is to some extent bolstered by exports, but also strong internal demand for consumption and investment. The U.S. economy is, in turn, bolstered by a healthy world economy and adds to that. So there was a lot of discussion about the growth together.

The questions about financial markets, of course, are on peoples' minds. One of the things that I think is very important is that emerging market spreads have been much lower recently than a year ago, a year and a half ago, two years ago. And while they've moved somewhat, as long as the good policies are in place in emerging markets - good policies on the fiscal side and the monetary side, where we're seeing some big improvements - those spreads shouldn't react much to any increase or changes in general world interest rates.

So that's the nature of the discussion, again focusing on the improvements in the economy. The emphasis, I would say, on sustainability, because the United States economy is recovering now from the 2000-2001 episode. It's a recovery that's gaining strength. The recovery in the United States and expansion in the United States in the 1990s was the longest in our history, the 1980s was the longest in peacetime history, and this expansion looks long as well. So we talked about how to keep expansions going. In Japan, the importance of continuing with the banking reforms, continuing with the monetary policy, and also with the structural reforms - trying to find ways to encourage entrepreneurs to start up firms, encourage the deregulation in the service sector. So those are the kind of things that we focused on. It's those markets, the markets for services, manufacturing, and of course the financial markets are part of that.

QUESTION: Any discussion about U.S. interest rates or the U.S. dollar?

TAYLOR: We didn't directly discuss any particular things with respect to upcoming decisions, but we did talk about the general good state of the world financial markets.

QUESTION: Thank you. Good morning. David Ibison from the Financial Times. Just an obvious question if possible: Do you believe that Japanese intervention in foreign exchange markets artificially depressed U.S. interest rates, and now that it's stopped, do you think that's going to expedite any possible interest rate increases? And the second question: How dangerous is Japan's recovery to the recovery? In the past there have been cyclical recoveries, which have been snuffed out by some odd policymaking decisions, and there is scant evidence at this point that it's moving through to consumer spending, which is a major component of GDP. Are you confident that the current policymaking team in Japan is skillful enough not to make the mistakes that were made in the past that snuffed out a recovery just as it was on the verge of becoming sustainable?

TAYLOR: On the second part of your question first, I have been very impressed with the policy changes that have taken place in Japan under Prime Minister Koizumi's leadership. The banking sector, the efforts to work towards privatization, the efforts on the monetary policy side have been good. In all of my discussions about that, I see continued focus on trying to maintain the momentum, noting that there have been improvements in the non-performing loans, but also noting that progress needs to continue to be made. So I'd say I have a great deal of confidence in the leadership and the execution.

The first part of your question has to do with the portfolio decisions of central banks with respect to foreign reserves, foreign exchange reserves, and the impact of that on interest rates in the U.S. and elsewhere. I've always stressed that the United States bond markets are very broad and strong and resilient. There are many people supplying and demanding in those markets. They're influenced by many factors, including expectations of inflation, and expectations of growth in the United States and other parts of the world, and the decisions about portfolios are not a factor that would come into play as a major issue in analyzing those markets. So that's how I'd answer your first question.

QUESTION: Simon Kennedy with Bloomberg. Were you concerned or are you disappointed by the rising trade deficit in the U.S? We saw record numbers yesterday.

TAYLOR: No, the monthly number, the trade numbers, are influenced basically by the savings and investment gaps. The United States continues to be a very good place to invest, and that investment being greater than savings represents an increase in the trade deficit and/or the current account deficit. So it's in many respects a sign of an attractive, growing American economy. What we're trying to do - and I think there's a lot of success here - is have higher growth elsewhere in the world, and that will create more balancing of trade accounts.

The one part of the world now which needs considerable increase in growth is in Europe, and particularly Germany. In Japan, the growth rate numbers there, forecasts, are coming down. We're working in the G-7 on things like the agenda for growth to encourage Germany to take actions to raise economic growth, and they're making those efforts. There are good policies being put in place. But I think that's the thing that I would look at, when looking at the trade imbalances or current account imbalances, is the need to have even stronger growth in certain parts of the world. I think it's really good now, the increase in growth we're getting, but there are still parts of the world where growth could be faster.

QUESTION: Sebastian Moffett from the Wall Street Journal. You expressed broad satisfaction with Japanese policymaking. Are there any particular areas which the United States wants Japan to try harder in ... which you talked about in the last day?

TAYLOR: Well, I would just emphasize how much progress has been made, at this point, because I have come to Japan several times in my current job and in previous jobs. I might say, by the way, just as an aside: I had a very good visit to some of the trading floors this morning - money markets, exchange markets, places I visited even before I had this job. I see a lot of improvements. The policy changes on non-performing loans: really good. Policy changes on monetary policy are really good. The efforts that are being made, as Japan makes decisions about where to go further, for example in privatization or deregulation, seem - to us - to be very consistent with the good things that should be done from an economic perspective.

So at this point in time, I think it's best to say that there are some real successes here. The dialogue between Japan and the United States on economic issues has been very fruitful. We've had a lot of it. It's a two-way street. We exchange information about the U.S. economy, about the Japanese economy, and there are just a lot of positive things now as both of our economies are growing rapidly.

QUESTION: Hideaki Matsuda from Jiji Press. You sounded very optimistic about the world economy, including the United States and Japan. What are the major risks facing both Japan and the United States and Europe, including rising oil prices? Thank you.

TAYLOR: One of the concerns you always have in an expansion is the possibility of it coming too fast and inflation picking up. That is not a problem in Japan right now. One of the reasons that I heard today from talking to economists about why this expansion is more sustainable than in the past, is there's just more room to grow. There are no pressures on inflation. In fact, the deflation is ending. There's room to grow in terms of capacity. So those are the kind of risks that are not there, with respect to sustainability. The average length of expansions in Japan in the past is not a good guide, therefore, on how long this expansion will last. The issue that comes up frequently is energy prices, as a risk. Going forward, right now there's been an up on oil prices, of course. It's very much hoped that those diminish and begin to come down again. There's always risk, and one of the jobs of policymakers is to be looking for them and be prepared for them.

But I would just say in that regard, again, the emerging markets have been, in the past, subject to many crises. In the 90's, you got many financial crises. Right now, there's not a major financial crisis in the emerging markets, and that's good news. It reflects good economic policy in those countries. It reflects, I think, an improvement in the general international markets, and I would say a risk would be that policies move away from the good policies that are being followed. I don't see that happening, because when I talk to the people I deal with in the policy-making circles, they recognize more and more the importance of good sound monetary and fiscal policy. So that kind of risk seems less than in the past, but of course it's always there.

QUESTION: Akiko Kashiwagi from the Washington Post. How do you see the significance of ... there's a lot of talk of China's growth sort of slowing down this year. How do you see its significance in terms of its impact on Japan's economy, and at what point China's slowdown would start to shake Japanese economy, as well as Asia?

TAYLOR: Yeah, thank you. China is growing very rapidly, and there have been concerns expressed from many people about the overheating in China, that's growing too fast. I think the Chinese recognize that and are taking actions to deal with inflationary pressures. No one knows exactly what too fast means, quite frankly, because it's a very vibrant economy with many opportunities. But what they're doing is taking actions to make sure that there's not an increase, resurgence, of inflation. If those actions slow the Japanese economy down, I believe it will be by a relatively small amount and should not have an impact of any major degree in Japan or elsewhere. What I think is important, with respect to thinking about Japan exports and China, is that there's a mutual reinforcement of good economic growth in China and Japan. But Japan now is having more and more of its growth coming from its consumption and investment in Japan - domestic consumption, domestic investment. So that creates a greater degree of insulation from fluctuations in exports more generally. So on two accounts, I see Japan more resilient to changes in China, but I also don't see a major reduction in China that would itself create a shock at this point in time.

QUESTION: Todd Zaun from the New York Times. I wonder if in any of your discussions if you heard from the Japanese side about ... they're putting changes in their policy toward intervening in the currency markets? I know the numbers have shown that intervention is slowing down, but did you get any indication that they have decided that active intervention is not working or wouldn't work in the future?

TAYLOR: Well, the intervention data was released yesterday, so that's all out there. The discussions that we've had about financial markets and exchange markets over the months have been very consistent with these statements that are put out publicly in the G7. The G7 statement in Dubai and again in Boca Raton and reaffirmed in Washington recently calls for flexibility in exchange markets. That's a particular concern that I raised when I was in China, the importance of a more flexible exchange rate there, and the Chinese have indicated publicly that they want to move towards a more flexible exchange rate. Part of the reason for our trip there was to work with them in a cooperative way to better prepare for a flexible exchange rate, and that notion of flexible exchange rates in that message in the G7 really is the principle that underlies all of our discussion. The particular actions on particular days, as long as they are consistent with that general principle, is not the thing that we spend a lot of time discussing. Yes?

QUESTION: Naoko Aoki with Kyodo News. Was the Chinese economy and the Chinese renminbi a part of your discussions with Japanese government officials? If so, what were your discussions about?

TAYLOR: Let me pause just to think about that, because we had so many topics we discussed. I would say that the nature of my discussion with Japanese officials, on the China exchange rate, was to report about my visit to China, the meetings that I had with the Central Bank Governor and other officials in China. We also talked about how there has been greater engagement with China in the G7. For example, my counterparts in China, the deputy governor of the Central Bank and the deputy governor of the Finance Ministry, have been meeting regularly with my counterparts in Japan and in the United States. So we talked about that engagement, and how important it was and how it would continue. So it's more or less a "progress report" type of discussion. We didn't change our views or principles. We're not looking for anything else except to assess the progress we're making with China. There's quite a bit, actually, and I wanted to discuss that and report to my colleagues about that, because it is really a global issue. The exchange markets operating with more flexibility is a global thing. You want to have smooth adjustments, and the flexibility creates more stability, really. If you have fixed exchange rates they can move sharply, and that tends to cause instability. If you have more flexibility, it creates stability in the world economy. So we discussed that. It's an important thing. China is becoming more and more significant in the world economy. It's size is growing. It's already very big. So it's natural ... in fact, I always comment it's hard to have a discussion about economics in the world economy these days without having a good discussion of China and its growth and its integration. So, yes, the answer is yes, we did discuss it.

Thank you.