Japan may slip from International Monetary Fund’s Number two shareholder status

Japan may slip from International Monetary Fund’s Number two shareholder status

Japan’s Slide Down the IMF Shareholder Rankings

As the International Monetary Fund (IMF) nears the completion of its quota reform by the end of 2021, Japan is set to lose its position as the second-largest shareholder – a position it has held for approximately three decades. This change comes in the wake of Japan’s sluggish economic growth and the depreciation of the yen against major currencies. With these factors in play, it is expected that Japan will be surpassed by China and Germany, relegating it to fourth place.

Quota Reform and its Implications

The IMF’s quota, which is a determining factor for a member’s contribution and voting power, is fundamentally based on economic power. Given this, the current situation of Japan’s economy is a significant factor in its expected demotion in the shareholder hierarchy. Despite this, the Japanese government has expressed support for an increase in the IMF’s capital resources but insists on maintaining the current quota ratio.

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Aiding Emerging and Developing Economies

The proposed increment in capital resources by the Washington-based institution is principally designed to assist emerging and developing countries grappling with financial shortages. These shortages have been exacerbated by the COVID-19 pandemic among other challenges. As such, the increase in capital is a critical step towards global economic recovery.

The Balance of Power in the IMF

The IMF, which is governed by 190 countries, plans to finalize its reform plans in December of this year. A broad agreement is anticipated next month during its annual meetings with the World Bank in Marrakech, Morocco. At present, the United States holds the largest shareholder position, owning 17.4% of all quota shares. Japan follows with 6.5%, and China with 6.4%.

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Projected Changes in Shareholder Positions

However, if the current formula continues to apply, China’s share is projected to rise to 14.4%, and the United States’ share will decrease to 14.8%. This represents a significant shift in the power dynamics within the IMF. Nevertheless, Japan and the United States are advocating for an increase in capital without changing the current shareholding ratios. On the other hand, China and other rapidly growing countries are pushing for the ratios to reflect the sizes of their economies. The negotiations remain ongoing, and the outcome is uncertain at this point.

The Role of Economic Size in Quota Ratios

Historically, the quota ratios have been primarily determined by the size of a country’s economy, using GDP figures. As such, the economic performance of a country significantly impacts its position within the IMF. With the impending quota reform, the IMF is set to witness a notable shift in its balance of power, highlighting the dynamic and evolving nature of global economic relations.

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