The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

30 March 2009

NO.007

Australia-Japan Economic Links: Standing the Test of Time

Address to Bloomberg

Tokyo, Japan

30 March 2009

-- check against delivery --

Firstly let me say what a pleasure it is to be back in Japan and to be able to make my first trip to Tokyo as Treasurer, which is also the first bilateral visit to Japan by an Australian Treasurer since 1995.

I've just had a very rewarding meeting with a number of key investors to discuss specific issues of interest to them and I look forward to answering your questions and talking with you personally at the conclusion of my remarks.

But my major topic for today is the one on everyone's mind – the global financial crisis and what our two nations can do to help overcome it.

Since my visit to Osaka for the G8 Outreach meeting in June of last year, the world economy has deteriorated dramatically.

In that short time, the IMF's forecast for world economic growth in 2009 has fallen from plus 3.8 per cent to between minus 0.5 per cent and minus 1 per cent.

Japan with its trade dependent economy has been hit particularly hard, as you would be all too aware.

Australia is also facing challenging times as growth in our major trading partners plummets and commodity prices fall.

In fact, no country has escaped the consequences of the global recession.

Both our governments have been doing all they can responsibly do to shield our economies and our people from the worst effects of the global recession.

Our policies are the correct ones.

My message today is that while it won't be easy, we can turn our economies around.

Our decisive domestic stimulus and financial reform measures will produce future growth and prosperity for our peoples, but only if all the nations of the world – Japan and Australia included – work together to fight the crisis and build a better global financial system. I'm confident that together our two nations can help the world achieve that goal.

Regardless of the respective size of our economies, it will be the quality of the ideas we propose and the strength of leadership we display that will have the major impact on the world's fortunes.

Our Productive Bilateral Relationship

As you know, our two countries have a long and successful history of working together for the common good.

Over many decades, Japanese growth and investment has supported the development of Australia's major export industries, and has helped lift the living standards of billions of people across the Asia-Pacific region.

I'm certain that just as it helped build regional and global prosperity, the Japanese economy will play a vital role in creating regional and global recovery. And we want to be your partner in this.

I agree wholeheartedly with Prime Minister Taro Aso's comment of November last year that the relationship between our two countries 'is reaching the most productive time in its history.' The global recession makes it also the most important time in its history.

Our joint efforts are being shown in our contributions to important regional forums such as APEC, the East Asia Summit and of course the G20. They are also demonstrated by Australia's strong support of the Chiang Mai initiative to provide emergency balance of payments support to the nations of our region. Australia stands ready to contribute if asked.

We are also fully prepared to play a greater role in strengthening regional financial markets – including through the creation of a stronger finance process in the East Asia Summit – one that interacts better with the important work of ASEAN+3.

Global Problem Requiring Global Solutions

So, as you can see ladies and gentlemen, much is being done. But there is clearly also much more to do.

The causes of this crisis are global – and the response must therefore be global. That is why Australia has been pushing hard to find international solutions.

Prime Minister Kevin Rudd and I were leading proponents of the idea to hold a Summit of G20 Leaders in Washington DC last year to develop a coordinated global recovery plan. That Summit has led to unprecedented global action to deal with this global recession. But events are moving quickly and so must we. The G20 process must continue to evolve.

Two weeks ago Finance Minister Kaoru Yosano, myself and the other G20 Finance Ministers and Central Bank Governors met to help plan a way forward. We pledged to support growth and jobs by 'taking whatever action is necessary until growth is restored'.

And we adopted the framework jointly proposed by Kevin Rudd and the British Government for dealing with the toxic assets that still infect so many banks in the US and Europe.

We also committed to substantial reform of the IMF and to increase its resources. As co-chair (with South Africa) of the G20 working group on IMF reform, Australia is particularly pleased to see progress in this area.

And critically the G20 has also begun the necessary steps to fix the financial regulatory lapses that allowed this crisis to arise in the first place.

Australia's Priorities for G20

With the groundwork now in place, the world's attention now turns to the G20 Leaders' Meeting this Thursday.

The way forward for that Summit is clear: to deal with the problem of toxic assets; to enhance the IMF; to maintain the impetus for fiscal stimulus measures; and to resist trade and financial protectionism.

Dealing with toxic assets necessitates implementation of the framework now agreed by Finance Ministers and to ensure that emerging markets and developing economies are able to benefit from those reforms.

Fiscal stimulus is just as important. Governments from right around the world have agreed to undertake substantial stimulus in 2009, in the order of 2 per cent of global GDP. This is providing support to all our economies and supporting jobs right around the world.

The IMF estimates that this combined global stimulus is supporting nearly 20 million more jobs than would otherwise be the case – that is 20 million less people unemployed globally.

And we have agreed to have the IMF assess what further stimulus might be needed beyond what has been agreed for 2009.

To complement domestic measures, we need to see at least a doubling of the IMF's pre-crisis resources, including a significant increase before the end of the year. In this regard, I particularly welcome Japan's generous US$100 billion line of credit to expand the IMF's lending capacity – a sum now matched by the European Union.

We must secure the IMF's resources over the medium- to long-term, via the expansion of, and a significant increase in, the New Arrangement to Borrow (NAB), as well as accelerating the next review of quotas.

And Australia continues to believe that the IMF's legitimacy and effectiveness depends to a significant extent on further re-alignment of quota and voting shares in line with economic weight.

Finally, we want to see a strong commitment from G20 leaders to resist trade and financial protectionism. Protectionist policies are unambiguously bad for the global economy and run the risk of accelerating the crisis.

Australia in the Face of the Global Recession

Fixing these global problems will significantly increase the effectiveness of any domestic responses we take.

Like the Japanese Government, the Rudd Government is focussed on cushioning our economy in the face of the worst global recession in living memory.

We are also investing in our long-term future, to ensure that we emerge from this crisis stronger, more resilient and more productive.

As I mentioned earlier, Australia has certainly not dodged the effects of this global recession. But we are better placed than other countries to deal with it.

While Australian output contracted in the fourth quarter of last year – as it did in most advanced economies and in much of East Asia – the contraction was far smaller than in almost all of our advanced economy peers.

This resilience can be put down to a number of factors.

Decades of structural reform have given our economy a high degree of resilience in the face of external shocks.

Our freely floating exchange rate is a particularly important shock absorber, with our commodity-driven dollar tending to appreciate when world growth is strong and depreciate when it is weak.

The state of our housing market has been another source of comparative strength. Unlike the US, Australia does not have a large overhang of excess housing stock. In recent years we simply haven't been building enough new houses for our growing population. As a consequence, and at a time when house prices in the US and Europe are declining precipitously, house prices in Australia have held up.

We have also acted to maintain a robust level of competition in the mortgage industry by providing a $A8 billion pool of capital for investment in the residential mortgage backed securities with a AAA rating. Half of these funds are earmarked for organisations that are not authorised deposit takers.

Crucially, our financial system is in good shape. Indeed, Australia's four largest banks are among the 11 strongest in the world, as rated by Standard & Poor's.

Like other countries, we have taken a range of measures to support the functioning and stability of our financial system – including guaranteeing the deposits and wholesale funding of Australia's banks, building societies and credit unions.

As the Reserve Bank of Australia said in its semi-annual Financial Stability Review last week "These arrangements have been successful in sustaining depositor confidence and in ensuring that Australian banks have continued access to capital market funding."

As of February, the major Australian banks were on track to issue as much as 10 per cent of global guaranteed issuance this year, making Australia the third biggest issuer of guaranteed bank paper behind the United States and France.

Reflecting the regard with which both our banks and our government guarantee are held in this country, two of the largest guaranteed bank issuances have taken place in the Samurai bond market.

This money is ensuring our banks continue to lend to businesses and households, which is providing vital support for Australian jobs and growth.

To put it simply, Australia has not suffered the acute financial stresses that many other countries have experienced.

Fiscal policy and monetary policy have both responded pre-emptively and decisively to cushion the Australian economy from the worst effects of the global crisis.

Australia's central bank, the Reserve Bank of Australia, has cut the cash rate further and faster, and to a lower level, than in living memory.

Importantly, however, it has room to cut rates further if necessary – a luxury that many of the world's key central banks no longer have.

And Australia's monetary policy transmission mechanisms continue to be far more effective than almost any other developed country.

The Australian Government has injected significant fiscal stimulus – around 2 per cent of GDP this fiscal year and next – into the economy without running up excessive debt and without moving outside of our medium-term fiscal framework. The majority of these funds are being used to invest in critical infrastructure, including skills, that will support long‑term prosperity while providing a boost to our economy over the next two years.

Ensuring that investment in critical economic infrastructure is maintained at all levels of government - despite financial market dislocation – was at the forefront of my mind when I decided to extend a temporary guarantee to the State governments for their debt issuance programmes.

Importantly we have laid out a clear plan to return the Budget to surplus and reduce debt over time, without undermining economic recovery.

Acknowledging the sustainability of our fiscal stimulus, Standard & Poor's recently publicly reaffirmed Australia's AAA long-term foreign currency credit rating. The ratings agencies have also noted the capacity of Australia's balance sheet to absorb the deficits currently projected.

Even with the large expected falls in revenues and extra spending in our stimulus packages, we currently estimate the Australian Government's net debt will be only a little over 5 per cent of GDP by 2011-12. This compares with an average net government debt of OECD countries of about 45 per cent of GDP.

The Australian Government is currently issuing bonds twice a week in auctions of around A$500 to A$700 million. The market for Australian Government bonds is efficient and liquid and will attract a large pool of investors both in Australia and abroad.

Australian governments from both sides of politics have always welcomed foreign investment in our economy and in our government securities.

Australian Government bonds offer attractive yields for investments of the highest quality credit, backed by the vitality of the Australian economy and the strength of the Government's overall fiscal position.

The Government will also be issuing Treasury Notes. These are short term discount instruments with terms up to six months that are used for managing the government's cash. In following years the volume on issue will vary according to the need but with a minimum amount in order to maintain liquidity.

Conclusion

I want to conclude by saying that Australia's policies have been the right ones for the times.

But domestic actions alone won't solve this crisis. Action must not only be decisive, it must be globally coordinated to achieve success.

Australia and Japan know this. We have both been actively pursuing these goals: the elimination of toxic debt; creating a stronger world financial system; stimulating our economies; keeping our region strong; keeping the needs of emerging markets always in mind; and protecting free trade.

This week's G20 Leaders' Meeting gives us the chance to put the global economy on the path to recovery and to limit the depth and duration of this global recession.

In the situation we are now in, and the opportunity we now have, taking global responsibility is the best form of self-interest for both of our nations.

Thank you.