If the International Monetary Fund today serves, in effect, as a tough lender of last resort globally, Japan last year gave itself the role of a friendly neighborhood bank in East Asia. That choice has proved timely, but it has become more challenging as the new year began. Unsettling news from two places as far apart as Brazil and South China threatened to scare international lenders and investors away from emerging markets.
The Brazilian government last week was forced to devalue its currency by over 8 percent against the dollar because investors had lost confidence in the government’s ability to tackle the country’s main problem — a public-sector deficit that was running last year at 8 percent of that country’s gross domestic product. The crisis was provoked largely by the failure to keep the political promise to keep inflation at bay through high interest rates and a stable exchange rate. In China, the Guangdong Trust & Investment Corporation has been forced by the central government to file for bankruptcy: This is China’s biggest corporate failure.
A decisive test of Japan’s regional economic policy this year is whether it can show results in its efforts to assist Asian countries struggling for economic recovery and restructuring. Of immediate interest is whether Japan’s recent financial initiatives can help restart capital flows to Asia, if not to the level of the exuberant past.
Another of Japan’s self-imposed tasks is raising a voice for itself and other Asian countries that will be heard in the all-important work of improving security for the world financial system. Japan wants, for example, restraint by the IMF against overly ambitious intervention in individual nations’ domestic policy. It is also known to be sympathetic to the temporary use of capital controls by countries in trouble.
In helping revive the battered economies of Southeast Asia and South Korea, Japan chose to focus on the problem of dried up liquidity, which Finance Minister Kiichi Miyazawa, in a December speech, maintained lay at the heart of the crisis of confidence. The liquidity gap is to be tackled through committing a large dose of official money, both alone and with other governments and international institutions.
Placed on the table were the so-called Miyazawa Initiative’s $30 billion and a separate credit line of about $5 billion, which was announced by Prime Minister Keizo Obuchi at the yearend summit with Southeast and East Asian leaders. These are separate from the $43 billion Japan chipped in earlier when the IMF put together rescue packages for the three most affected countries — Thailand, Indonesia and South Korea. Another example of multilateral assistance is the joint Japan-U.S. initiative of last November for Asian growth and recovery, for which Japan was reported as ready to put forward $3 billion and the U.S. $2 billion in funding.
One way of looking at the Japanese moves is to see them as compensatory actions. They are driven in part by the need to counteract shrinking private-sector activities in a region crucial to Japan’s interests — and not just commercial interests. Even so, in the face of the continuing credit contraction, the Japanese initiative was welcomed by member countries of the Association of Southeast Asian Nations, the IMF and the World Bank.
The first of the two packages readied for implementation under the Miyazawa plan is directed to Thailand, a model country that has made advanced reforms in return for IMF assistance. The other recipient is Malaysia, a proud dissenter that chose, instead of going to the IMF, to defend itself against external shocks with capital and currency controls. In one of the programs for Thailand, Japan joins forces with the World Bank to support the Thais’ far-reaching financial-sector reform. The Malaysian package is explained as designed to meet that country’s financial needs in export industries, small business development, technical training and power generation.
The key question for Japan is figuring out a way to use its assistance without having it work at cross-purposes with aid from other sources. Despite Japan’s known preference for noninterventionism and its tolerance of the use of capital controls by countries in difficult situations, policy conflicts are unlikely. Much of the total resources committed by Japan this time are couched in one multilateral framework or another. Besides, Mr. Miyazawa himself has expressed hope that the initiative bearing his name will eventually grow into a regional contingency fund open to Asian and non-Asian participation alike.
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