*EPF202 10/22/2002
Transcript: Treasury's Taylor Discusses Japan's Need for Economic Reforms
(Under Secretary of the Treasury October 21 press roundtable in Tokyo) (4290)

The Bush administration is "very supportive" of the Japanese government's efforts to restore economic growth in Japan and "to have the problems that are holding back growth dealt with," according to Under Secretary of the Treasury John Taylor.

Speaking at an October 21 press roundtable at the U.S. Embassy in Tokyo, Taylor said it was important that Japan dispose of non-performing loans, "so that the underlying assets that are behind these loans can be moved to more productive uses, so that the banking system can make more loans."

There are always costs to economic reform, Taylor said, but one should not discount the benefits of reform.

Some Japanese firms "are going to expand more rapidly than others," Taylor said, while "some firms are not going to be as successful as others."

He stressed, however, that the reforms being discussed for the banking sector for resolving the issue of non-performing loans "have all the potential to raise growth, raise productivity," Taylor said.

Resolving Japan's banking sector problems, he added, "fits in very well to the problem of ending deflation" in the that economy.

Taylor explained that while the Bank of Japan "has been increasing the growth rate of the monetary base," that increase of the monetary base "has not yet translated into an increase in broader measures of money, or to an increase in prices."

Taylor said it was important for Japan to follow strategies both for ending deflation as well as for improving that country's banking sector.

Following is the text of Under Secretary of the Treasury John Taylor's October 21 press roundtable in Tokyo:

(begin transcript)

Under Secretary of Treasury John Taylor
Press Roundtable
October 21, 2002
U.S. Embassy Tokyo, Japan
5:15 p.m. local time

U/S Taylor: Thanks a lot for coming. I've come to Japan to participate in the financial dialogue, and the joint press statement for the United States and Japan is being handed out. The meeting was held between myself, as the leader of our delegation, and Mr. Kuroda of the Finance Ministry, as the leader of the Japanese delegation. The meeting is part of the partnership for economic growth, which President Bush and Prime Minister Koizumi established the summer of last year. The purpose is to discuss issues in the Japanese economy and in the U.S. economy, and policy issues to address them.

One thing that we reiterated in this meeting, which is very important, is that Japan and the United States are the two largest economies in the world, and we have a special responsibility, as stated in the dialogue press release, to have strong economic growth and to have both of our economies live up to their potential.

Some of the issues we discussed with respect to the Japanese economy included efforts to overcome deflation and efforts to deal with problems in the banking sector. Some of the problems we'd discussed in the United States economy were our efforts to continue to have this expansion in the United States, which is already underway and doing well.

I'll also, while I'm here, have the opportunity to meet with other people in the government. I'll be meeting with people from the Bank of Japan. I'll be meeting with people from the private sector, from academia... We are very supportive of the efforts underway that the Prime Minister has emphasized to President Bush, and which is quite evident in the activities that are going on now to restore economic growth in Japan and to have the problems that are holding back growth dealt with. We're very supportive of what's happening, and while I'm here I'm emphasizing that support.

So let me leave it at that and take any questions that you have.

QUESTION: I'm Yoichi Takata from Nihon Keizai Shimbun. Did you discuss Japanese non-performing loan matters? Of course, the Koizumi Administration is just now concentrating on solving this problem.

U/S TAYLOR: Yes, the Prime Minister has indicated that he wants to address this problem, and the things we discussed in the meetings were how to most effectively address it. What was stressed is the importance of disposing of the non-performing loans, so that the underlying assets that are behind these loans can be moved to more productive uses, so that the banking system can make more loans. It actually fits in very well to the problem of ending deflation because the Bank of Japan has been increasing the growth rate of the monetary base, but that has not yet translated into an increase in broader measures of money, or to an increase in prices. One reason for that is the problems in the banking system. So by addressing the non-performing loan problem, we're able to make monetary policy more effective in ending the deflation so the banking problem and the monetary problem are closely linked. And that importance of the banking sector and non-performing loans was what was addressed today.

QUESTION: When Yanagisawa resigned and Takenaka took over, there was a lot of furor and a lot of optimism that finally Japan was going to do something to get its economy back on its feet and to deal with the bad loans. Comments were made, for example, Takenaka said, "No company is too big to fail." Of course, he retracted those comments later on. And last week we had the bailout of Daiei, the second one this year, and the first time the government has actually poured money into the supermarket chain. So, the kind of message that that gives to the market is that the government is willing to keep these zombie companies. I mean, what kind of message do you think that gives-and do you think, you know, for the Japanese government, that it's better for them to let these companies fail so that new companies can come out in their place? I mean, what's your assessment of that bailout and possible further bailouts over the next few weeks?

U/S TAYLOR: Well, there's going to be a report that's going to be put out in the next few days, which is going to elaborate on what the particular plans are with respect to the non-performing loans and to the companies that are not performing the payments on these loans. My expectation is that there will be a serious effort to address the problem, because that's what has already been stated. So I think what we should do is look and see what is actually proposed. Now, what I would say is that if there's going to be growth, restoration of strong growth, in Japan, which I believe is essential for many reasons. There's going to have to be firms that are going to expand more rapidly than others. Some firms are not going to be as successful as others. That's what a vibrant, growing economy is all about, and that means that it's going to be necessary for some firms to make adjustments, to go into other businesses, to stop moving in other businesses. And as the non-performing loan problem is resolved, I expect to see that. There's tremendous potential in the Japanese economy for growth if capital is allocated efficiently, if investment picks up. That's what we've tried to stress in our support for what Mr. Takenaka and his team are doing.

QUESTION: Jason Singer from The Wall Street Journal. How difficult do you think it would be for policymakers to implement an aggressive plan to fix the bad loan issue, given Japan's sort of lack of a social safety net?

U/S TAYLOR: Well, Japan has a system for unemployment compensation. They've also indicated in discussions that if there are problems with the social safety net, they're going to address those. So I expect that any adjustment costs that will occur as a result of dealing with these problems will be addressed in that way. Now I also would say that, while there are always costs to economic reform, you shouldn't underestimate the benefits and the potential. That's what I would stress, that reforms that are being discussed, the efforts to change banking policy so that non-performing loans are resolved, have all the potential to raise growth, raise productivity. That's what I would stress. Now, there are going to be costs. Those costs should be addressed, and I believe the government of Japan is going to address those, but it's also a tremendous potential for Japan to resolve these problems in an efficient way.

QUESTION: (unidentified) How difficult do you think it will be, given the costs, to implement this politically, even if they say that they'll address the costs down the line? But politically, it may be very difficult to even have these measures adopted, given the demographics of Japan, also.

U/S TAYLOR: Well, of course the Japanese government and Japanese people will have to make the implementation, and we are supporting them as they make these choices. Economic reform always requires a political census and a political will, and I think what we've been seeing in recent discussions is an effort to really move towards the reforms. So I can't predict how the politics will play out, but I can say-and speaking from an economic perspective-that there are tremendous benefits to Japan and the Japanese people to get these problems sorted out. And I see some good signs right now.

QUESTION: I'm Yon Ggi Kan from Reuters. You've expressed support for the Bank of Japan's plan policy of buying shares owned by banks. Are you satisfied with the Bank of Japan's current policy, and if not, are you going to address that issue when you meet officials from the Bank of Japan?

U/S TAYLOR: Well, the Bank of Japan last year in March indicated that they were going to raise liquidity with the goal of bringing inflation above, or at least equal to zero. And during the last year, they have in fact increased liquidity as measured by the monetary base-and that has been very important. Before I went into government, I was an adviser to the Bank of Japan and urged that kind of increase in monetary base as a private citizen. And I'm very glad that they've taken that route. That is, to increase the monetary base. But it's important to continue to increase the monetary base, to keep it strong, because ending deflation will require continued growth of the monetary base. I would also say that now that the Bank of Japan has taken those steps, it's necessary to address the problems in the banking sector, because those problems are what is holding back the efforts of the Bank of Japan to raise money growth and to actually end the deflation. You need to have not only the increase in monetary growth. You need to have a banking sector that is healthy, that intermediates between borrowers and lenders so that that higher growth rate of the monetary base is higher growth of money supply more generally, and the higher rate of inflation that ends the deflation. So they hang together, and I've been emphasizing that in my discussions: the close connection between monetary policy actions and banking policy actions.

QUESTIONS: James Simms from Dow Jones. There are some, say in the government and the LDP, that say that the deflation problem needs to be addressed first. Otherwise, you're just going to be sort of like-I don't know-treading water because it's just going to continue to worsen the bad loan problem. I mean, do you see any difference between the U.S. and the Japanese view on the order that policy should be taken?

U/S TAYLOR: I think those problems are related and should be addressed together. If they're not, then it's going to be very difficult to solve either one. They feed back on each other. The deflation leads to declining prices, which leads to postponing of purchases and declines in demand. The near-zero interest rates lead to delays in dealing with bad loan problems. The slow growth in the economy creates more problems with the loans. So they're intimately related. The Bank of Japan is doing the monetary policy side, and the banking policy side needs to be done as well, so that you've addressed both of these problems. But, you couldn't emphasize it more, just ending deflation is very important for Japanese growth, and dealing with the non-performing loans and fixing the banking policy is important for growth and for ending deflation. So they go together.

QUESTION: (Simms) Mr. Taylor, a few minutes ago, in response to a question, you said that you've seen some good signs. But I'm just curious, other than the rhetoric, I mean, what exactly have you seen? The Daiei bailout, for example. I mean, it seems like-you know-the government won't let that fail. It's become a test case. But there are some other big companies, such as Isuzu. Will we be looking at how those are handled in the coming weeks to determine whether the government's really serious about it?

U/S TAYLOR: Well, the government is going to announce a policy in the next few days, which will clarify these particular decisions, and I think we need to look at what that policy is before we look at particular cases. They'll be many cases to consider. Some will be viewed one way, some will be viewed another. But what I think is important, and why I say I'm encouraged, is that there's an effort now to address both of these problems - the banking problem and the deflation problem together. I think that's very promising, and I very much hope that Japan is able to carry it out. I think it's looking at particular issues in particular cases has to be in the context of the policy that's going to be announced.

QUESTION: David Pilling from The Financial Times. I think few economists would argue that a healthy banking sector is a prerequisite for economic growth, but there are economists who say that even if you had a healthy banking sector that would not lead to growth, because there's a lack of demand for loans. There are two examples that often come up. One is the fact that there are healthy foreign banks operating in Japan. They're also contracting their credit. The second is that you have very well managed companies, like Toyota, that are sitting on huge amounts of cash apparently, but unable to find anything to do with it. What indication do you have that even if there was a healthy banking sector, that would make any difference?

U/S TAYLOR: Those are good points, and I think that's why the strategy of ending the deflation and improving the banking sector together is so important, because by ending the deflation we'll be able to increase demand for loans. We'll also be able to have a system where loans which are not performing are dealt with, and the firms can be moving directions-can change their business, move in directions where they're going to be more productive and have more demand for loans. So the banking sector itself, when it's reformed in conjunction with ending the deflation, will create more demand for loans. It definitely goes together. It's correct to say it's not just the banking sector. It's also ending the deflation.

QUESTION: (unidentified) So a related question concerning Japanese fiscal policy. Do you have some idea about cutting Japanese taxes? That's the first question. The second question is, what do you think about accepting the devaluation of the Japanese yen to solve such deflationary pressure?

U/S TAYLOR: I haven't made any particular proposals with respect to tax policy. There is discussion of tax policy in the fiscal policy in the financial dialogue. You can ask my Japanese colleagues for proposals that are being considered on the tax side, but I think it's important for fiscal policy to look for ways to both consolidate the deficits over the medium term and to find ways to stimulate economic growth. In a general way, I have always emphasized as part of our policies that we think are good for all economies, to have low marginal tax rates and a broader base. And if that's the kind of reform... I know the Japanese government is considering longer-term reforms, and tax reform is one of them. I'd certainly encourage that activity. But with respect to particular tax actions now, you'll have to address that question to the Japanese government

On the exchange rate, I always have to say that in the United States we have a long tradition that the Secretary of the Treasury is the person who speaks about exchange rates, and I'm going to leave it at that.

QUESTION: Asahi Shimbun, Toshio Jo. I understand that the U.S. government is always interested in how Japan is going to address the non-performing loan problem, but with Takenaka taking the current position has the U.S. level of interest and also expectation reached a new dimension? And how is the United States government continuing to support the current course of . . .

U/S TAYLOR: I believe that we've been pretty consistent with our constructive advice and dialogue with Japan, and that is to stress the importance of ending deflation, monetary policy, and to deal with the banking sector, and primarily even non-performing loans. It's a discussion that we've had for over a year and I think that when you see efforts that are being taken that look promising in those directions, you're going to be encouraging. That's what we are trying to do, be encouraging. It's something that we think will help the Japanese economy, help the Japanese people. It's a policy which was important for global economic growth. The United States is important for global economic growth. But so is Japan, and Japan's taking these actions will, I believe, do a great deal to improve economic growth. So that's why we've stressed it. I think it's a consistent theme. It's one that we've emphasized. We've also emphasized that it's Japan decision to make. It's up to their policy. The people in a democratic society are going to make these decisions, and we are offering friendly advice. Of course, the Japanese give suggestions to us, too. We've emphasized this two-way dialogue, and that's what the Partnership for Economic Growth is all about. It's been part of the Partnership for Economic Growth, for which there have been many meetings of the dialogue and sub-cabinet and etc.

QUESTION: Hideaki Matsuda with Jiji Press. The Japanese government is considering the injection of public funds into the banking system to accelerate the disposal of NPLs. Do you think the public money injection is necessary? And if you think it's necessary, how should it be done?

U/S TAYLOR: The public money, if it goes into the banks, should be done in a way that strengthens the banks, make sure that there's good supervision and good regulation going out, that the management is effective, and the decision about how much or when or if is really something that you're going to see coming from the government of Japan. The only thing I would stress is that when public funds do go into a banking sector, so that grow can occur, that it be done in a way that supports and strengthens the banking sector so it doesn't have to be continually done in the future.

The non-performing loan problem was discussed in a recent Bank of Japan report, and they pointed out something very interesting. That is, that the old bubble cannot explain the continued development of non-performing loans, and to reduce that problem you have to have a strong banking sector, and you have to have economic growth. That's what any policy decision has to do, whether it's putting in public funds, or no matter how the public funds are put in. So again, just to summarize, I would stress that it's important to have any infusion of public funds, if that's the decision, done in a way that strengthens the banks and strengthens the supervision and strengthens the ability of the banks to give new loans efficiently.

QUESTION: David Pilling of Financial Times again. Given that tackling deflation seems to be a sensible policy option, again I don't think anyone would deny that, but have you looked at the dangers associated with inflation? I mean, it seems that Japan is kind of damned if it does, damned if it doesn't. Because if there's inflation that could hit the bond market, it would make it more difficult for some of these companies to repay their loans. Have you looked at the dangers, and how do you think those could be offset?

U/S TAYLOR: Well, too much inflation is bad. Deflation is bad. The idea is to have a price stability, which is basically a low level of inflation, and different countries choose different low levels of inflation. But what has been actually very interesting to me is, if you go back to the periods of good strong growth in Japan from 1974-1991, the growth rate of Japan in real terms averaged 3.8% per year. From 1991 to now, it's 1.1% per year. If you go back and look at that earlier period, there wasn't deflation. It was modest inflation, which I would characterize as price stability. And that's feasible in Japan, just like it's feasible in other countries, so I certainly would advocate a good monetary policy that has a low inflation rate and price stability much more than the deflation, which causes the kind of harm that we've seen. Is that helpful?

QUESTION: (Pilling) Yes.

QUESTION: (unidentified) Where does the Taylor Rule suggest interest rates should be?

U/S TAYLOR: I always think that the policy rules on interest rates have to be supplanted and complemented or added-things have to be added to it when there's deflation. Because when you run into deflation, the interest rate goes to zero, or near zero as it is now. That causes its own problems, and so if a policy that focuses on interest rates, which most central banks have done. And of course you mention the Taylor Rule, which is a guideline for many central banks . . . You have to have an interest rate that's moving to make that effective. So when the interest rate hits zero, then it's very important to focus on quantities. Money growth, monetary base growth, that's what the Bank of Japan has begun to do, and I think its' very important. Since March of last year, they've focused on these quantities because the interest rate at that point becomes a bad signal. You can't lower it any further. I would say that the same thing is true, to go back to the other question, if inflation would ever to get very high, you also have to go back and look at the monetary aggregate. So these interest rate rules, which are so popular, apply in a healthy range of monetary policy, where interest rates are positive but not too high. That's where I hope they stay for most counties, and where I hope they get to Japan soon so they can use rules like that as a guideline.

QUESTION: (unidentified) So it's doesn't apply for Japan now?

U/S TAYLOR: It does, because what you have to say is you want to get the inflation rate into zero or positive territory so that you can then be using the interest rate in that way. But you have to more towards an inflation rate, for which you have a positive interest rate, and then that's the guideline. So what it tells you, basically, is when you should move the interest rate above zero. Then that's going to require that the inflation rate be positive. In fact, the Bank of Japan has said that they want too keep the zero interest rate until inflation goes above zero. And that's exactly what rules like that would suggest you do.

QUESTION: Sato, I'm with Kyodo News. The Bank of Japan will soon start purchases of shares from banks, and the details of the plan were announced recently. What is your assessment of the plan, and do you think that the purchase will help banks to accelerate the disposal of bad loans?

U/S TAYLOR: The purpose of the policy is to help banks reduce the quantity of shares that they hold and, as you know, they have been trying to reduce that quantity for a while. The Bank of Japan has offered this method in order to assist them to do that. But the plan itself is not something that deals with the non-performing loans. I think the hope is that actions like that would generate discussion about non-performing loans and, in fact, there has been a lot of discussion about non-performing loans. There has been more action by the Bank of Japan to raise this important issue, and the ultimate goal would be, of course, to have non-performing loans dealt with by changing banking policies so that Japanese monetary policy can work more effectively.

QUESTION: Hi. Hans Greimel, Associated Press. To what degree were you given a sneak preview into the Japanese economic plans that they expect to roll out next week, and what were the weak point and the strong points?

U/S TAYLOR: We were very careful to discuss issues that were not specifically related to the new ideas. So I think you're going to have to ask the Japanese for the details on that. I have been very encouraging. We discussed the non-performing loans issues with the representative from the FSA, as well as from the Ministry of Finance. We've stressed how important it is to have a plan that deals effectively with those, but the nature of the plan is something that you'll have to wait and see just like everybody else. Thank you.

(end transcript)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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