Along with increasing liberalization of trade and investment, economic globalization has been making rapid progress in Asia. Goods, capital, technology, and management resources are moving briskly across national borders. At the same time, the domestic markets of individual Asian nations have been increasingly integrating with the world market.
Globalization had brought about rapid growth in most East Asian countries in about two decades before 1997, but it had also generated a financial crisis, followed by years of economic recession.
The East Asian experience has shown not only that globalization can enhance the efficient utilization of the factors of production, but also that it can destabilize national economies. Given that globalization will move even further ahead in the coming years, Asian countries should effectively utilize this trend but at the same time must endeavor to prevent or overcome any instability that could result.
In actively preparing to usher in the age of globalization, and in conjunction with the policies of individual Asian countries, Japan’s role in constructing a regionwide cooperative system will be important.
Among the several areas of such cooperation, the effort to stabilize the currency system is particularly urgent. In this regard, there are two policies Japan should adopt.
One is to call for the establishment of a regional monetary fund to effectively prevent currency crises, maintain economic stability, deal with the consequences of crises that do occur, and promote recovery from economic downturns.
The other policy is to promote the wider use of the yen in the region.
Some months after the financial crisis first struck in Thailand (in July 1997), the setting up the Asian Monetary Fund (AMF) was in fact proposed through Japan’s initiative. The proposal was not realized, however, due to opposition from the United States and the International Monetary Fund.
They contended that such an institution would be redundant given the presence of the IMF, and that in times of crisis, Asian countries might decide, with the consent and protection of that institution, to adopt imprudent policies that could pose a clear conflict of interests.
However, such ethical dilemmas could be avoided by setting up clear criteria and conditions for providing assistance to crisis-stricken countries.
The functions and roles of the IMF in effectively preventing currency crises, dealing with the consequences of such crises and promoting recovery from economic downturns have recently proved to be subject to certain limitations.
One major role of the IMF is to stabilize macroeconomic environment, not to contribute to the strengthening of the supply side of the countries it supports. Its assistance is limited to improving liquidity, not supporting such real economic activities as export financing or shoring up banks’ lending capability.
Moreover, the financial resources of IMF are quite limited, while the institution has to to be ready to support countries all over the world.
In a word, there is a need for a new institution that plays a role complementary to the IMF’s. Such a framework cannot be established on a worldwide scale, though, because forming a consensus among a large number of countries will be difficult and require considerable time. In addition, crises are often a matter of regional concern, and it is perhaps only natural that deeply interdependent countries should help each other out.
In September 1997, the AMF was proposed as an institution that would supplement the IMF and other international institutions. After the the effort was blocked by criticism from the IMF and the U.S., Japan subsequently announced bilateral assistance plans such as the New Miyazawa Plan (worth $30 billion) and special yen loans (650 billion yen), and has continued to implement them.
I think that Japan’s quick response through comprehensive programs aimed at strengthening the supply side of Asian countries in trouble have contributed considerably to the quick recovery of the economies of this region since 1999.
Japan should not, however, assume this as a permanent framework. Indeed, it will no doubt one day reach the limits of its ability to continue performing the role. In the meantime, the concept of an AMF centered on Japan — and featuring the participation of China, Taiwan, South Korea, and the ASEAN countries among others — deserves a closer look.
There have been growing calls from many Asian countries, such as Thailand, Malaysia and South Korea, for the establishment of such an institution under the leadership of Japan.
Just last May, at a meeting in Chiang Mai in Thailand, ASEAN members and Japan, China and South Korea reached an agreement to set up a framework of financial swapping among these countries.
The accord was a good start in furthering talks on the establishment of the new fund. If Japan again offers such a proposal and if AMF principles include the participation of countries outside the region, on the condition that they contribute funds to the institution, then the U.S. and other countries will likely endorse this plan.
The yen alternative
The second policy is to encourage the wider use of the yen in Asia. With the advent of the euro, the international monetary system is likely to shift from a unipolar system revolving around the dollar to a bipolar system.
In Asia, dependence on the dollar has come to be viewed as problematic, a position reinforced by the currency crisis of recent years.
There are increasing expectations on the yen to assume a role complementing the dollar. It is entirely feasible that the yen will become the key currency in Asia in the intermediate to long term, and that the world will see the formation of a tripolar currency system.
At the present time, however, despite the overwhelming economic power of Japan in Asia and the deepening interdependence between the countries of the region, the status of the yen in the region remains weak.
This is reflected not only in the small share of the yen in the foreign exchange reserves of Asian countries, but also in the small role the yen plays as a currency for trade settlements between these countries and Japan itself.
For example, in the fiscal year ended March 1998, yen-denominated exports accounted for a relatively low share (48 percent) of total Japanese exports directed to Asia. Such a share in Japanese imports from Asia was even much smaller, only 27 percent in the same year.
Stable currency rates
There are a number of measures that could expand the use of the yen in Asia. First, Asian countries should revise their current exchange rate policies. They should shift from a dollar-peg policy to a policy of stable exchange rates versus the yen and the dollar. The stability of Asian currencies against both the dollar and the yen could be maintained by determining exchange rates through linkage to a basket of currencies.
Second, Asian countries should increase the use of the yen in the foreign currency reserves of their central banks. Japan should actively promote the internationalization of the yen and try to establish the conditions needed for the yen to serve as an international currency.
Third, on the side of Japan, it should further encourage the internationalization of the yen on one hand and take the initiative in promoting the use of the yen in Asia on the other.
Regarding the latter point, Japan should make full use of every possibility, including even official development assistance (ODA). Japan is the world’s top ODA donor and the principal recipients of this are in Asia.
Yen loans will no doubt continue to have a major presence in Asia, particularly in assisting the development of the Indochinese Peninsula. Given the high likelihood of fluctuations in the yen rate over the long term, Asian countries assume the risk in repaying the yen loans.
Future payment fears
In fact, some countries are reluctant to accept yen loans for fear that the yen may continue to rise. To lessen this problem and to promote the yen’s internationalization, a package framework should be built combining yen loans with yen-denominated imports from Asia.
Such a framework might involve Japan importing duty-free from a less developed Asian country — on a yen-denominated basis — industrial products in an amount corresponding to a set percentage of the yen loans accumulated by that country.
In the process, relevant organizations in Japan would cooperate in the production of competitive industrial products through market research, technology transfers, and quality improvement efforts.
This approach would not only avert or reduce the foreign exchange risk involved in yen loans but also would promote the export of industrial products from Asia and contribute to the internationalization of the yen — killing three birds with one stone.
Japan should promote yen-denominated imports through various measures, not limiting itself to yen loans, but the increase in yen-dominated imports tied to yen loans will prime the pump and help generate an overall increase in such imports.
There remain, of course, several problem areas in this recommendation. One problem with yen-denominated imports is that they would contradict a yen-loan principle that does not allow repayment in kind.
However, so far as yen loans provided to less developed countries are concerned, Japan should be flexible by setting an exception of that principle.
Another problem is that the idea may not be in keeping with World Trade Organization rules, based as they are on the principle of free and nondiscriminatory trade. This problem, however, could be overcome by contending that Japan has a special responsibility to provide assistance to the less developed countries in the region.
Globalization and Asia’s options Japan Forum on International Relations, Inc. has put together a report, “Economic Globalization and Options for Asia,” and presented it to Prime Minister Yoshiro Mori. Here are the main points of the forum’s recommendations:
1. In order to maintain stability, Asian countries should take a gradual approach to liberalization of their financial and capital markets.
2. To prepare for the coming age of megacompetition, these countries should continually make supply-side improvements and strengthen the real economy.
3. They should give particular importance to strengthening their social capabilities, such as governance, administrative systems and human resources, in order to be able to cope with globalization.
Using global resources
4. Sustained economic development should be sought through an efficient international allocation of resources by promoting trade liberalization.
5. Liberalization of direct investment should be promoted and maximum use of the management resources of multinational corporations should be made.
6. Countries in Asia should improve the ability to absorb foreign management resources by developing human resources and acquiring greater skills for policy formulation and organization.
7. They should promote an orderly international movement of labor and boost the vitality of the Asian region as a whole.
8. Cooperation should be promoted to strengthen the economic fundamentals of less developed countries.
9. Japan should promote actively its intellectual cooperation to enable Asian countries to close their “skill gap,” such as shortage of experience in drafting development strategies.
10. Japan should promote cooperation for Asian countries to build up social safety nets in order to minimize unexpected negative impacts of globalization on their economy and society.
11. Asian countries should seek stabilization of their exchange rates through an effective basket system, by which exchange rates of Asian currencies are determined through linkage to a basket of currencies.
12. The Asian Monetary Fund should be set up in order to prevent another currency crisis and maintain economic stability, with the participation of China, Taiwan, South Korea, and ASEAN, under the leadership of Japan.
13. Japan should promote vigorously the internationalization of the yen and stabilize economic transactions between Japan and the rest of Asia.
14. Japan should build a package framework combining yen loans and yen-dominated import, by taking the initiative in promoting the use of the yen in Asia.
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