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Finance ministers of the 10-member Association of Southeast Asian Nations plus Japan, China and South Korea have agreed to working out a scheme to pool part of their foreign reserves for multilateral currency swaps as a means of preventing a currency crisis like the one that struck Asia in 1997. Although it is expected to take two to three years to draw up the scheme, the agreement, which could serve as a bulwark against speculative funds, is a meaningful step forward toward stabilizing the currency situation in the region.

The agreement stems from the bitter experience of the Asian financial crisis, which started when hedge funds withdrew their short-term funds from Thailand, causing the baht to crash. The crisis also shook other countries, including South Korea, Indonesia and Malaysia.

The affected countries sought a bailout from the International Monetary Fund. But without taking into account the specific situations in those countries, the IMF linked financial assistance to stringent conditions aimed at quickly achieving structural reforms. This gave rise to regional anger toward the IMF. In an attempt to lessen reliance on the organization, an idea of creating an Asian Monetary Fund was floated. But the United States, opposed to the idea, quashed the attempt.

To improve their currency-related resilience, ASEAN plus Three agreed in 2000 to establish a network of bilateral currency swaps called the Chiang Mai Initiative, which now consists of 16 bilateral swap agreements among eight countries worth $80 billion. During the 40th anniversary meeting of the Asian Development Bank, the finance ministers agreed that the 10 ASEAN countries and the three Northeast Asian countries will contribute part of their foreign reserves to create a self-managed reserve-pooling arrangement.

The countries have to work out details, including how to manage the pooled fund, how to assess the countries’ economic conditions, the size of the contributions, when and how to offer assistance, limits to the amount of the assistance and so forth. Japan, with its large economy and foreign reserves, must show leadership in realizing the agreement.

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