News Brief No. 95/12

News Brief: Camdessus Welcomes Bank of Japan's Decision to Cut Discount Rate

April 13, 1995

Michel Camdessus, Managing Director of the International Monetary Fund, today made the following statement:

"I welcome today's 75-basis-point cut in the official discount rate by the Bank of Japan. Coming on the heels of the interest rate reduction by the German Bundesbank at the end of March, this action should also help to alleviate pressures on foreign exchange markets," Camdessus said.

"The large and rapid exchange rate changes that we have seen recently pose a risk of higher inflation in the United States, threaten to weaken the expansion in Europe, and could jeopardize recovery in Japan. I believe these monetary policy actions were appropriate to counter these threats," he added.

"I believe it is now opportune for the United States to complement these actions by raising its short-term interest rates. This would contribute to a strengthening of the dollar, which would be appropriate given its role as the key international currency. It would also help contain the domestic inflationary pressures that will result from a weak dollar.

"Recent exchange rate movements have also accentuated the need for broader policy actions in a medium-term perspective. Since the early 1980s, a persistent current account deficit has increased U.S. net foreign liabilities, and contributed to the decline of the dollar. A significant and sustained reduction in the U.S. external deficit requires a corresponding rise in the relatively low level of U.S. national saving. The most effective way to increase U.S. saving is through more ambitious fiscal consolidation. Early and credible steps to reduce further the U.S. federal deficit would send an appropriate signal to the markets that the problem was being addressed, provide the additional saving required for an improvement in the external balance, and make the dollar less vulnerable to shifting market sentiments. In Europe also, intensification of efforts at fiscal consolidation during this period of recovery should have higher priority. For Japan, stronger efforts at deregulation and market opening measures will contribute to the efficient operation of the domestic economy and may help to reduce the pressure on the yen. Therefore, it would be helpful from both a short-term as well as a medium-term perspective for Japan to accelerate this process on a priority basis, including the announced measures," Camdessus said.