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When Haruhiko Kuroda was named in November as the new chief of Asia's most influential development agency, central bankers knew it would not be long before the career technocrat shifted the agenda back to the delicate issue of monetary union. And the timing could not be any better, given the dollar's free fall, concern over the sick US trade and fiscal accounts and the risks these entail for the region's blossoming free trade agreements.
But the more pertinent questions being asked have less to do with the economics of convergence than its political ramifications: who has the most to gain and what does Japan in particular want out of it? Kuroda, who officially took over at the Manila-based Asian Development Bank (ADB) on February 1, knows what he wants. His introductory statement to staff referred to integration as "a special and unique mission of a regional development bank".
In follow-up interviews, Kuroda has spoken of his mission to promote economic stability through intraregional cooperation in trade and exchange systems and of the advantages of achieving a single Asian currency. A weighty tome on foreign exchange stabilization published on Friday quotes the British-trained economist as specifically calling for the establishment of an Asian Monetary Fund (AMF) that could take on the role of reforming financial systems in much the same manner as the International Monetary Fund (IMF).
Japan has taken its cue from the wake-up call of the 1997-98 East Asian economic turmoil. As vice-minister for international affairs at the Japanese Finance Ministry, Kuroda helped prepare Tokyo's $30 billion rescue package for Indonesia, Thailand and Korea, later overseeing the rehabilitation process when he became a special adviser to Prime Minister Junichiro Koizumi. While the original AMF concept was devised by Eisuke Sakakibara, the charismatic architect of Japan's 1990s monetary strategy, much of the groundwork is believed to have been done by a team under Kuroda.
Tokyo first presented the proposal to a stunned meeting of central bankers as the three East Asian countries were exhausting their offshore reserves in an ultimately fruitless effort to prevent currency meltdowns. It wasn't supposed to come out until there had been regulatory reforms of exchange regimes, especially a dismantling of the inflexible dollar-linked currency baskets that were eroding offshore confidence as the appreciating greenback made East Asian exports uncompetitive.
But the Japanese were unhappy over the austerity measures forced on the afflicted economies by the IMF and the World Bank in return for a financial bailout, fearing -- rightly, as it transpired -- that an overly conservative approach would push them into a full-blown recession. The financial mandarins in Tokyo wanted fiscal pumping and low interest rates so Asian exporters could trade their way out of the quagmire -- and protect billions of dollars worth of Japanese investments in the region.
A deeper motivation was that Japan saw an opportunity to reduce the massive pressures exerted by the dollar in trade and exchange markets, which were correctly viewed as a prime cause of structural instability. More than 90% of East Asian trade was transacted in dollars at the onset of the crisis, and the greenback was widely believed to comprise at least 80% of the weighting in adjusted currency baskets even though Japan was the region's leading trading partner and a crucial source of foreign capital.
Sakakibara's predicament was that Japan's global standing was at its lowest ebb for a decade or more, tarnished by its stagnant domestic economy and historic impotency within the IMF, which has a tradition of alternating leadership between the United States and Western Europe. Japan is automatically accorded the chairmanship of the ADB, but still has to defer to the IMF when it comes to the big decisions on financial infrastructure. Regionally, Tokyo's clout relies heavily on bilateral credits that don't carry the same weight.
It was no surprise that the IMF reacted with hostility to the AMF plan, but Tokyo appeared to be less prepared for the harsh response from Washington, which was already under siege from the imminent launch of a euro zone in Western Europe. "Realistically, the dollar is going to dominate international commerce as long as the US economy remains dominant, but it is not in Washington's interest to have the IMF's global reach usurped or undermined by regional monetary cooperation," said a diplomat. "And of course Tokyo made it easy for everyone by failing to do its homework."
Poorly researched, possibly because it had been rushed out to suit a particular economic situation, the AMF was generally greeted with skepticism and just as quickly vanished. But its legacy was felt in other ways. Despite US resistance, the 10 members of the Association of Southeast Asian Nations (ASEAN) linked their international reserves with Japan, China and South Korea in May 2000 as part of a currency swap framework that became known as the Chiang Mai Initiative. An Asian Clearing Union (ACU) has been functioning since 1975 to settle intraregional trade transactions in local currencies, and ASEAN has had a currency swaps arrangement since 1977 to deal with temporary international liquidity problems.
At a surveillance level, the Executives' Meeting of East Asia and Pacific Central Banks (EMEAP) was set up in 1991 to monitor financial market developments and exchange information on perceived threats. More recently, Thailand has instigated an Asian Bond Fund as a part of the Asian Cooperation Dialogue, with the objective of developing domestic capital markets and reducing reliance upon speculative inflows from abroad.
The Chiang Mai Initiative has particular potential. As a deliberate strategy of insulating exchange systems through current account surpluses, it has seen Asia's currency reserves swell by 20% a year since the 1997 crisis. But it is a long way from Sakakibara's vision of monetary union. With much of Asia -- including the entire Indian subcontinent -- left outside, Japan and China together account for almost 60% of combined reserves. And most are still dollar holdings.
In the meantime, Japan has been polishing up the AMF formula and, reverting to its traditionally more pragmatic approach, has shifted the battleground to the diplomatic front. Two years ago, the ADB launched a scathing attack on the IMF's role in the global financial architecture by floating the idea of "credible emergency financing from official sources, with less strings". In language that clearly was aimed at Asia's central bankers and monetary chiefs, the institute's Japanese dean, Masaru Yoshitomi, called for "collective measures to restore systemic currency stability, including joint interventions".
Simultaneously, Kuroda's predecessor at the ADB, Tadao Chino, began to challenge the World Bank's function as the final arbiter of global development policy by setting the agency on a more independent footing. ASEAN countries have given warm, if qualified, support for monetary union, even awarding the ADB Institute a contract several years ago to conduct regular surveillance of the members' economies, in a pointed intrusion into the IMF's turf.
But as Kuroda has acknowledged, monetary integration is not going to happen overnight, especially as barriers remain at the trading levels through restricted flows of labor, capital and financial services. Liberalization pressures from the World Trade Organization and regional blocs like ASEAN and the Asia Pacific Economic Cooperation are forcing the exports market open, but the deals are still couched in dollars. Neither the yen nor the yuan has the regional recognition as an acceptable alternative; the Chinese currency is directly pegged to the greenback, while the yen's recent history of weakness has hindered East Asian export growth.
While suspicions will linger over Japan's intentions, some analysts believe the debate will eventually come down to a numbers game: unlike the euro zone, Asia simply doesn't have the money on the table to achieve a viable level of currency self-sufficiency. "It is easy to forget that it took two decades or more for the euro zone to come into being, even with the backing of such vibrant economies as Germany, France and the UK. I think they need to develop the swaps arrangement further ... it is going to take at least another US$50 billion to create an effective safety net ," said a European banker. "Japan has its own reasons for keeping the issue alive, but one would have to say it is largely a symbolic exercise at this point in time."
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Asia Times Online
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