Section 4. International Monetary and Financial Problems



1.  International Monetary Situation


(1)  The dollar had appreciated almost consistently against other currencies and stayed at an exceedingly high level from mid-1980 to the spring of 1985. But in a sharp turnaround, the correction of the overvalued dollar has progressed rapidly since the September 1985 meeting of the Group of Five (G5) Finance Ministers and Central Bank Governors.

(2)  Throughout 1986 and well into 1987, the dollar kept losing its value, reaching the \144 range temporarily in late March this year. This represented a sharp rise of the yen's value about 67% from just before the G5 meeting when the dollar stood at \242.

(3)  Such an unprecedented rapid appreciation of the yen has brought a serious blow to the Japanese economy, export-oriented firms in particular. Taking advantage of various opportunities, such as the release of the joint statements after the meetings of the Finance Ministers of Japan and the United States in October 1986 and in January 1987 and the gathering of the finance ministers and central bank governors of major industrial nations in February, Japan has made a great effort to stabilize exchange rates in cooperation with other major countries.

(4) Reflecting the strong performance of the European economies, major European countries also have appreciated against the dollar. But the disparity of the economic performances among European countries was reflected by the difference in the pace of each currency's appreciation against the U.S. dollar. As a result, the European Monetary System implemented a multilateral currency parity adjustment in January 1987, up-valuing the West German mark, while leaving the value of the French franc unchanged.



2.  Moves in and Around the International Monetary Fund (IMF)


(1)  Improvement of the International Monetary System

At a meeting of the finance ministers and central bank governors of the Group of 10, held in June 1985, discussion was carried out on the basis of the report submitted by G10 deputy finance ministers. The prevailing view at the meeting was that the complete return to the fixed exchange rate system or the introduction of a "target zone" was unrealistic at present. The conferees agreed on the need to aim for the harmonization of the economic performances of each country and the coordination of their economic policies through the strengthening of surveillance (mutual monitoring of each other's economy) in order to stabilize foreign exchange rates. At two rounds of the IMF Interim Committee meetings held in October 1985 and in April 1986, participants studied the G10 report as well as the report submitted by the finance ministers of the Group of 24 representing views of developing countries. At the Tokyo summit of seven industrial countries in May 1986, the agreement was reached on international policy coordination chiefly designed to strengthen the surveillance and the inauguration of a meeting of the finance ministers of the seven countries. At a meeting of the G7 finance ministers held in September 1986, the participants agreed on the full implementation of the Tokyo Economic Declaration adopted at the Tokyo Summit and the promotion of close and continuous economic policy coordination. The IMF Interim Committee met in September 1986 to consider ways to utilize the economic indicators in the surveillance process and the agreement was reached that indicators should be chiefly focused on the progress influencing the sustainability of current account balances and the policy that should serve as the basis for such progress. At a meeting of the finance ministers and central bank governors of major industrial countries held in February 1987, the conferees referred to as major indicators the growth rate, inflation rate, current account/trade balances, fiscal balance, monetary situation and exchange rates. Further, the IMF Interim Committee at a meeting in April 1987 gave high marks to the progress made in the economic policy coordination of major industrial countries and studied ways to strengthen the policy coordination process and the multilateral surveillance through the expansion of the scope of economic indicators. The committee also requested the IMF Board of Executive Directors to conduct research on the enhanced use of economic indicators.


(2)  SDR Issue

The Interim Committee at a meeting in April 1987 discussed the question of SDR allocations. Though most members favored a new allocation, the board support needed was lacking at this time. The Committee urged the Executive Board to continue further discussion on SDR allocations.


(3)  Access to IMF Funds

The Interim Committee met in September 1986 and reached agreement to maintain the expanded financing quota system in 1987 and continue with the current financing ceilings as listed below in consideration of the deteriorating economic situation of oil-producing developing countries as a result of lower crude oil prices.

 (a)  normal case

      One Year 90%, Three Years 270%, Accumulation 400%

 (b)  special case (covering countries with very bad international balance of payments positions)

      One Year 110%, Three Years 330%, Accumulation 440%


(4)  Status of Use of IMF Funds

The amount drawn from the Funds fell to 3,100 million SDRs in the 1985-1986 financial year from 6,100 million SDRs in the 1984-1985 financial year, reflecting the improvement in external balance and foreign exchange reserve positions in some member countries. On the other hand, outstanding loans made by the IMF decreased to 3,460 million SDRs in the 1985-1986 financial year from 3,490 million SDRs in the 1984-1985 financial year, mirroring the approach of the repayment deadline for the IMF loans made in sizable amounts at the beginning of the 1980s.


(5)  Structural Adjustment Facility

The Interim Committee met in October 1985 and agreed to use the funds to be repaid to its Trust Fund, which is estimated to reach 2,700 million SDRs by 1991, to support low-income countries eligible for IDA loans. On the basis of the agreement, the Executive Board established the Structural Adjustment Facility (SAF) in March 1986. By the end of 1986, agreements were reached on nine cases of lending totaling 192 million SDRs under the facility.


(6)  Japan's Financial Contribution to IMF

At a meeting of the Interim Committee and a joint annual general meeting of the IMF and the World Bank in September 1986, Finance Minister Kiichi Miyazawa stated that Japan is ready to lend 3,000 million SDRs to the IMF as a temporary measure to enable the IMF's flexible response to the deterioration of developing countries' international balance of payments positions. Japan and the IMF later held negotiations on lending terms and they concluded a lending agreement at the end of December 1986.



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