There’s little hype. Certainly no fanfare. But quietly and with infinite patience, Asia’s economies are hoping to bond together.

In June, 11 Asia-Oceania central banks announced a plan to create a $1 billion fund to invest in Asian government and quasi-government bonds.

The central banks, including those of Japan, Australia and New Zealand, hope to lure local capital into China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore and Thailand.

If and when the Asian Bond Fund gains momentum and bond markets grow, the fund will operate in a basket of local currencies. The idea is to siphon excessive savings in Asia away from U.S. Treasury bonds and other dollar-denominated assets, and bring them directly to local businesses.

The Bank of Japan has so far put $100 million into the fund, which is managed by the Swiss-based Bank for International Settlements, known as the central bankers’ bank.

“It’s going to take years of small steps to bring about an attractive bond market in Asia,” said Akinari Horii, director general of the BOJ’s International Department, adding that the central banks are doing this quietly. “Personally, I don’t like propagandizing.”

Critics say there’s a reason for Horii’s reticence: at first glance, it appears the fund could leave the U.S. government in a lurch.

Foreign reserves in the Asia-Oceania region grew from $800 billion in 1999 to nearly $1.5 trillion now, with the world’s seven biggest holders of dollar reserves in Asia. Take that money away, and the U.S. government may have problems financing its debt.

Japanese central bankers and Finance Ministry officials pooh-pooh such concerns, however.

“Foreign investors and hedge funds currently investing in Asia will move more funds back into U.S. Treasuries,” one senior Finance Ministry official said. “Money is fluid.”

The BOJ’s Horii said the general response from the U.S. Federal Reserve Board, the BOJ’s counterpart, was enthusiastic.

Currently, the money that flows out of Asia into the U.S. comes back in investments and loans, allowing U.S. investment banks to dominate Asia’s bond markets, which are worth $50 billion. The figure excludes Japan. That money could simply flow back.

The fund is a necessary step but insufficient as a means to protect Asia, said Takatoshi Ito, professor of economics at the University of Tokyo and a former deputy general at the Finance Ministry.

“Asia remains open to currency and liquidity risks that could cause a repeat of the currency crises of 1997,” he said. The Asian Bond Fund is useless as a shield to Asian markets as long as it remains dollar-denominated and a passive investor, he added.

It could be years before the fund can begin buying corporate bonds in local currencies. The fund involves China, which has yet to develop a bond market, and whose currency is pegged to the dollar. Meanwhile, speculative sovereign credit ratings of member nations go as low as Indonesia’s C rating.

“You have to train in the minor leagues before you can play in the majors,” Horii said.

Nonetheless, U.S. investment banks have already expressed interest in buying more Asian bonds, according to sources close to the fund.

Mitsubishi Tokyo Financial Group Inc., which is seen as the most likely Japanese bank to participate in the scheme, declined comment.

Other Japanese banks have so far expressed little interest.

“Frankly, we can’t afford it,” said a representative of Mizuho Corporate Bank, citing limited short-term returns. Following record losses in fiscal 2002, five major Japanese banking groups are under special watch by the Financial Services Agency to increase profits in the current business year, or risk changes in management.

“If Japanese banks are unwilling, we’ll just go ahead without them,” Horii said. “It’s their loss over the long term.”

As for Japan’s individual investors, it will be a long time before they start buying up continental Asian corporate bonds, said Sadakazu Osaki, an analyst at Nomura Research Institute. “They still remember being burned by the Asian crisis.”

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