• Kyodo

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Japan on Friday suggested that Asian economies should establish an institution to pool foreign-exchange reserves as part of efforts to achieve stability in currency markets in the region.

According to a report presented Friday to an Asia-Europe finance ministers’ gathering by Finance Minister Masajuro Shiokawa, a currency basket system should be adopted by Asia’s emerging-market economies “collectively, at the regional level” to prevent a currency crisis like the one in 1997 and 1998.

The crisis stemmed from several nation’s stubborn defense of artificial pegs, including the Thai baht’s link to a currency basket.

Since the nations involved severed their pegs, currencies in the region have mostly stabilized and the likelihood of a second crisis has been largely defused.

Japan, however, has continued to battle the currency market as it tries to keep the yen weak, stoke exports and lift its moribund economy.

The report, known as the Kobe Research Project, was compiled by experts from private-sector institutions in Asia and Europe after the ministers of the Asia-Europe Meeting agreed to gather input on monetary collaboration at their last meeting in Kobe in 2001.

The report says that an agreement in 2000 by the Association of Southeast Asian Nations, Japan, China and South Korea in Chiang Mai, Thailand, to set up a regional network of bilateral currency-swap arrangements “needs to be accelerated and should be completed soon.”

Once the arrangement is completed, “regional financial cooperation should go beyond bilateral swap arrangements and establish a more formal institution for foreign-exchange reserve pooling,” the report says.

The proposed system would “enable the timely disbursement of financial assistance at a time of currency crisis and contagion,” the report says.

The report also suggests establishing a currency basket system that links the central rate of a currency to a basket of major currencies, such as the dollar, the yen and the euro.

“This would prevent excessive fluctuations in effective exchange rates in the face of volatile exchange rate movements among the major currencies, while allowing their currency some flexibility to move within a certain range, possibly formalized as an explicit fluctuation band,” the report says.

“In the long run,” it says, “the region may agree on a common basket currency arrangement, create a regional currency unit (the Asian Currency Unit), and eventually develop a common monetary arrangement, like the euro.”

The report also makes four other suggestions, one of which is to establish an independent secretariat to boost effective regional surveillance to prevent a currency crisis.

The three others are to promote further economic and financial integration in Asia, to strengthen financial systems and deepen capital markets in the region as well as to bolster political leadership for regional financial cooperation.

Forex reserves rise

Japan’s foreign-exchange reserves hit a new record at the end of June for the third month in a row, rising $26.55 billion from a month earlier to $446.2 billion, the Finance Ministry said Friday.

The increase was due to a series of currency market interventions by Japanese monetary authorities, a stronger euro against the dollar and rises in the prices of Japan’s U.S. bond holdings, a ministry official said.

The government intervened six times in the foreign-exchange market in May and June in a campaign to prevent a rapid rise of the yen from stifling Japan’s fledgling export-led recovery.

According to a report released Friday, Japan remained the largest holder of foreign reserves of any country or territory for the 31st consecutive month.

The foreign-exchange reserves consist of securities and deposits denominated in foreign currencies plus International Monetary Fund reserve positions, IMF special drawing rights and gold.

The previous record was $419.65 billion at the end of May, which followed $406.7 billion at the end of April.

According to the report, Japan had $363.38 billion in foreign securities in June, up from $337.37 billion in May, and $65.47 billion in foreign currency deposits, down from $65.97 billion.

Of the deposits, $8.71 billion were at foreign central banks and the Switzerland-based Bank for International Settlements, $32.5 billion at Japanese banks and $24.26 billion at foreign banks.

Japan had $7.84 billion in gold, down from $8.04 billion in May.

It had $7.07 billion in IMF reserve positions and $2.44 billion in SDRs.

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