Asian Monetary integration: Asian Monetary integration: y y g g - - PowerPoint PPT Presentation

Asian Monetary integration: Asian Monetary integration: y g y g A Japanese Perspective A Japanese Perspective

M hi K i M hi K i Masahiro Kawai Masahiro Kawai

Dean & CEO Asian Development Bank Institute

Asia Europe Economic Forum Asia-Europe Economic Forum “Impact of the Eurozone Debt Crisis on East Asia”

Hosted by ADBI, Bruegel, CEPII, EC, KIF, Korea University, etc y , g , , , , y, Seoul, 9-10 December 2011

Outline Outline Outline Outline

1 Introduction Introduction 1.

• 1. Introduction

Introduction 2.

• 2. Impact of the Global Financial

Impact of the Global Financial 2.

• 2. Impact of the Global Financial

Impact of the Global Financial Crisis on Japan Crisis on Japan 3.

• 3. Japan’s Exchange Rate Policy

Japan’s Exchange Rate Policy 4 Japan’s Strategy for Regional Japan’s Strategy for Regional 4.

• 4. Japan s Strategy for Regional

Japan s Strategy for Regional Monetary Integration Monetary Integration 5.

• 5. Conclusion

Conclusion

• 1. Introduction
• 1. Introduction

Is there a case for regional exchange rate policy coordination in Asia? rate policy coordination in Asia?

• The Asian financial crisis (1997-98) highlighted

the value of regional monetary & financial the value of regional monetary & financial cooperation: CMI, ERPD, ABMI, EMEAP

• Common shocks from the global capital markets

Common shocks from the global capital markets (GFC, US QE2 and possible QE3, the eurozone sovereign debt and banking crisis) affect many economies in the region economies in the region

• Rising regional economic inter-dependence in

Asia suggests a case for monetary integration Asia suggests a case for monetary integration

• What are the lessons from the euro crisis for

Asian monetary integration? Asian monetary integration?

• What is Japan’s strategy?

• 2. Impact of the Global
• 2. Impact of the Global

Financial Crisis on Japan Financial Crisis on Japan

• Real sector impact
• Impact on the yen
• Impact of yen appreciation

Impact of yen appreciation

• n the Japanese economy

(1) Real Sector Impact (1) Real Sector Impact

• The global financial crisis (GFC) adversely

affected Japan’s exports, imports, industrial affected Japan s exports, imports, industrial production and real GDP

• Japan had negative growth in 2008
• Japan’s exports were affected both in finished

products for the US & EU markets and parts and components for the EEA markets p

• These impacts were largely similar across East

Asia

• The triple disasters due to the 3.11

earthquake, tsunami and nuclear plant failures affected the economy significantly affected the economy significantly

• The economy continued to shrink until 2011Q2;

there was a rebound in 2011Q3 and recovery there was a rebound in 2011Q3 and recovery expected in 2012Q4 and in 2012.

Japan’s exports plunged, then rebounded Japan’s exports plunged, then rebounded

Export Growth in Japan and emerging East Asia (in %)

60 40 60 20 ‐20 ‐60 ‐40

Jan‐ 06 Apr‐ 06 Jul‐ 06 Oct‐ 06 Jan‐ 07 Apr‐ 07 Jul‐ 07 Oct‐ 07 Jan‐ 08 Apr‐ 08 Jul‐ 08 Oct‐ 08 Jan‐ 09 Apr‐ 09 Jul‐ 09 Oct‐ 09 Jan‐ 10 Apr‐ 10

PRC Japan NIEs ASEAN 5

Source: CEIC database

Japan exports by sector: Japan exports by sector: A t h d t hit b t b di A t h d t hit b t b di Autos hardest hit, but now rebounding Autos hardest hit, but now rebounding

Y/y% change Yen-value Y/y% change, Yen value 60 80 60 80 20 40 20 40

• 20
• 20
• 60
• 40
• 60
• 40
• 80

06 07 08 09 10 11

• 80

G l hi El t i l hi T t i t A t

Source: CEIC Database Co.

General machinery Electrical machinery Transport equipment Autos

Japan import growth remained firm, Japan import growth remained firm, except from Taipei,China except from Taipei,China

Y/y% change, US$ value 60 60 20 40 20 40 20 20

• 20
• 20
• 40

06 07 08 09 10 11

• 40

Source: CEIC Database Co.

Total Korea PRC Taipei,China

Japanese economy contracted sharply Japanese economy contracted sharply due to the global financial crisis due to the global financial crisis due to the global financial crisis due to the global financial crisis

15 5 10 5

• 10
• 5
• 15

5Q1 Q2 Q3 Q4 6Q1 Q2 Q3 Q4 7Q1 Q2 Q3 Q4 8Q1 Q2 Q3 Q4 9Q1 Q2 Q3 Q4 0Q1 Q2 Q3 Q4 1Q1 Q2

Real GDP growth rate (year-over-year)

2005 2006 2007 2008 2009 2010 2011

USA EU Japan China India Asian NIEs Asean 5 India Asian NIEs Asean 5

Source: IMF, International Financial Statistics, CD-ROM; Eurostat

GDP rebounded in 2011Q3 GDP rebounded in 2011Q3

GDP growth (y-o-y, %)

• Contrib. to Real GDP, Y/y Pctg. Pts.

4 6 4 6 2 4 2 4

• 4
• 2
• 4
• 2
• 8
• 6
• 8
• 6
• 10

06 07 08 09 10 11

• 10

C ti P i d N t E t GDP

Source: Cabinet Office

Consumption

• Priv. cap. expend.

Net Exports GDP

Japan’s economic growth forecasts Japan’s economic growth forecasts

Consensus forecasts for Japan real GDP (% change) 2011 2012 Median

• 0 4

2 8 Median 0.4 2.8 Mean

• 0.5

2.8 Capital Economics

• 0.2

2.5 Daiwa Institute of Research

• 0.7

2.5 UBS

• 0.4

2.9 CITIC Group

• 0.2

2.4 Nomura Securities

• 0.3

3.1 JPMorgan Chase 0.0

• Morgan Stanley
• 1.2

2.9 BNP Paribas

• 0.8

2.1 C dit A i l 0 7 2 9 Credit Agricole

• 0.7

2.9 Itochu Corp

• 0.3

2.8 Japan Research Institute

• 0.9

3.3 Mitsubishi Research Institute 0 4 2 4 Mitsubishi Research Institute

• 0.4

2.4 Mitsubishi UFJ Research and Consulting

• 0.8

3.4 Reference IMF

• 0 7

2 9 IMF 0.7 2.9 OECD

• 0.9

2.2

Source: Bloomberg accessed on 9 September 2011, IMF (2011), OECD (2011)

(2) Impact on the yen (2) Impact on the yen

• The global financial crisis (GFC) caused the

yen to appreciate, rather than depreciate, unlike in many other economies

• Massive repatriation of the US dollar back to the US

markets driven by cash-short US financial firms markets, driven by cash-short US financial firms

• Korea saw rapid capital outflows and a mini won crisis
• Japan’s yen appreciation partly due to the unwinding

p y pp p y g

• f carry trades
• Following the triple disasters, the yen began to

appreciate with the expectation of Japanese appreciate with the expectation of Japanese insurance firms’ repatriation back home

• The nominal value of the yen continued to

The nominal value of the yen continued to appreciate, breaking the historical record reached in April 1995

• Monthly average rate: 76.84 yen/$ (Sep. 2011) vs.

83.67 yen/$ (April 1995)

Why yen appreciation?

Despite the aging pressure and rising public debt, the yen remains strong

• One fundamental reason is price deflation in

Japan, that sets the long-term trend of nominal yen rates yen rates

• Another reason is persistent current account

surpluses surpluses

• The third reason is a safe haven effect; The

Japanese economy is not growing, but its Japa ese eco o y s

• t g o

g, but ts growth prospect is better than those of the US and Europe given the latter’s problems

S i d bt d b ki i i i th

• Sovereign debt and banking crisis in the eurozone
• Rising public debt, high unemployment, uncertain

property prices, and potential for QE3 property prices, and potential for QE3

Nominal yen appreciation driven partly Nominal yen appreciation driven partly by Japan’s price deflation by Japan’s price deflation by Japan’s price deflation by Japan’s price deflation

350 300 325 350

Yen/US$ Yen/US$

225 250 275 175 200 225 100 125 150 75 1970 1975 1980 1985 1990 1995 2000 2005 2010 N i l R PPI R i CPI R i

Source: International Monetary Fund, International Financial Statistics, CD-ROM

Nominal Rate PPI Ratio CPI Ratio

Japan's current account is still in surplus Japan's current account is still in surplus p p p p

5 (% of GDP) 3 4

(% of GDP)

2 3 1 2

• 1
• 2

1980 1985 1990 1995 2000 2005 2010

Current Account Goods Trade Balance S i T d B l I B l Sevices Trade Balance Income Balance

Source: IMF, International Financial Statistics, CD-ROM

(3) Impact of yen appreciation on (3) Impact of yen appreciation on th J th J the Japanese economy the Japanese economy

• The yen’s overall real effective exchange rate (BIS

y g ( REER), based on relative CPIs, is still about 30% lower than in the previous peak in 1995

• But the REER for the automobile sector suggests

that the level is about the same as the 1995 level

L ti ill ff t th t l t d

• Large negative spillover effects on the auto-related

sectors (steel, tires, glass, electronics, etc)

• Business concern over the hollowing-out of
• Business concern over the hollowing-out of

Japanese manufacturing

• Sectors which have exited Japan are less affected

p

• Competitive sectors, like automobiles and technology &

knowledge intensive sectors, are now severely affected

• Some evidence of a shift towards nontradables

Real effective exchange rates of the yen, Real effective exchange rates of the yen, BIS d t d f t bil BIS d t d f t bil BIS data and for automobiles BIS data and for automobiles

150

2005 100 2005 100

130 140

2005 = 100 2005 = 100

110 120 30 90 100 110 70 80 90 60 70

1980 1985 1990 1995 2000 2005 2010

BIS Automobiles (US & Korea) Automobiles (US, Korea & Germany)

Production of nontradable goods relative to Production of nontradable goods relative to t d bl d ( i l & l) 1980 t d bl d ( i l & l) 1980 100 100 tradables goods (nominal & real), 1980 tradables goods (nominal & real), 1980＝100 100

190

1980=100

160 170 180

1980=100

120 130 140 150 90 100 110 120 1980 1985 1990 1995 2000 2005

Nontradable Output/Tradable Output (Nominal Values） N t d bl O t t/T d bl O t t（R l V l ） Nontradable Output/Tradable Output（Real Values） Trend Line for Nominal Values Trend Line for Real Values

Note: Tradable goods are those produced in agriculture, mining and manufacturing, and nontradable goods are those produced by other sectors Source: Constructed from data published by Cabinet Office, Government of Japan

• 3. Japan’s Exchange Rate
• 3. Japan’s Exchange Rate

Policy Policy

• Japanese yen as a freely

floating currency floating currency

• Foreign exchange market

i t ti intervention

• Support of emerging Asia’s

Support of emerging Asia s exchange rate stability

(1) Japanese yen free floating

• Japan fully liberalized its capital account in the

1980s, and adopted free floating in order to t li i d d pursue monetary policy independence

• This is different from emerging East Asian

economies which are either financially under economies which are either financially under- developed so that they have to maintain some capital controls, or they are small and open (H K Si ) h h (Hong Kong, Singapore) so that they attempt to stabilize their exchange rates against outside currencies currencies

• As a result exchange rate regimes in Asia are

diverse, although there has been some g convergence towards greater exchange rate flexibility, except in China

• Degrees of intra regional exchange rate
• Degrees of intra-regional exchange rate

fluctuation are often large

Japan adopts free floating while exchange Japan adopts free floating while exchange t i i E t A i di t i i E t A i di rate regimes in East Asia are diverse rate regimes in East Asia are diverse

Hard Peg

w Low High Monetary Policy Independence

Intermediate Regime g

Dollarization Currency board

MalaysiaChina Thailand China Hong Kong Brunei

Low y

Intermediate Regime

Conventional fixed peg (Soft peg)

y Thailand China Indonesia Korea Philippines Philippines

Flexibilit

Crawling peg

Thailand Philippines

nge Rate

Singapore Singapore Malaysia

Managed float

Indonesia Korea

Exchan

Pure Float

Korea Japan

High

Pre-1997 2011

Source: Author

Impossible trinity in East Asia Impossible trinity in East Asia

Source: Ito, Hiroyuki and Masahiro Kawai (2011)

Yen and emerging East Asian currencies Yen and emerging East Asian currencies f i i di i f i i di i

• ften move in opposite directions
• ften move in opposite directions

130

Nominal Exchange Rate vs. USD

120 125 130 110 115 100 105 90 95 75 80 85 75 2000M01 2001M01 2002M01 2003M01 2004M01 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 2011M01

ASEAN currencies Japanese Yen Chinese RMB Korean Won Indian Rupee

Source: International Monetary Fund, International Financial Statistics, CD-ROM

The yen The yen-

• won rate is often very volatile

won rate is often very volatile y y

16

Large yen/won volatility

13 14 15

• The won was strong

before the global financial crisis but,

10 11 12

, following the Lehman collapse, depreciated sharply from 907 won/$ (O t 2007) t 1 483

7 8 9

(Oct. 2007) to 1,483 won/$ (Nov. 2008)

• The won/yen rate

d f b l 8

4 5 6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

moved from below 8 won/yen in mid-2007 to above 15 won/yen at end 08 and early 09

1 9 9 0 M 0 1 1 9 9 1 M 0 1 1 9 9 2 M 0 1 1 9 9 3 M 0 1 1 9 9 4 M 0 1 1 9 9 5 M 0 1 1 9 9 6 M 0 1 1 9 9 7 M 0 1 1 9 9 8 M 0 1 1 9 9 9 M 0 1 2 0 0 0 M 0 1 2 0 0 1 M 0 1 2 0 0 2 M 0 1 2 0 0 3 M 0 1 2 0 0 4 M 0 1 2 0 0 5 M 0 1 2 0 0 6 M 0 1 2 0 0 7 M 0 1 2 0 0 8 M 0 1 2 0 0 9 M 0 1 2 0 1 0 M 0 1 2 0 1 1 M 0 1

end-08 and early 09

• Such a large volatility of

exchange rate is t d ti t

Source: IMF, International Financial Statistics, online

Korean Won/Japanese Yen

counterproductive to trade and investment

(2) Foreign exchange market (2) Foreign exchange market i t ti i t ti intervention intervention

• Japan intervened heavily in the past on some

p y p specific occasions, particularly to prevent rapid yen appreciation such as during 2003-04 Th t t i t ti i N b 2011

• The most recent intervention in November 2011

was a record high in terms of monthly intervention volume intervention volume

• Intervention was often, but not always, sterilized
• Intervention was sometimes but not always

Intervention was sometimes, but not always, coordinated with the US and other authorities

• Impacts of intervention have been limited in

p stopping currency appreciation, but, it likely

• Lessened the speed of yen appreciation

A id d f f ll f th US$ th

• Avoided a free fall of the US$ vs. the yen

Japan MOF intervention in the foreign Japan MOF intervention in the foreign h k t h k t exchange markets exchange markets

9,000 10,000 6,000 7,000 8,000 9,000 3,000 4,000 5,000 1,000 2,000

• 3,000
• 2,000
• 1,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 199 199 199 199 199 199 199 199 199 200 200 200 200 200 200 200 200 200 200 201 201 MOF Intervention

Note: Positive numbers indicate purchases of foreign currency with the yen, and the negative numbers indicate sales. Source: Japan Ministry of Finance, official website

Coordinated intervention

Period # Days Episodes Period # Days Episodes

February 1987 1 Yen appreciation (Louvre Agreement) January - February Yen depreciaiton together with low performance 1992 3 in the stock market April - June 1993 4 Yen appreciation due to Japan-US trade friction May June 1994 2 Yen appreciation due to Japan US trade friction May - June 1994 2 Yen appreciation due to Japan-US trade friction November 1994 2 Yen appreciation due to Japan-US trade friction Yen appreciation due to the Mexican currency March - May 1995 4 pp y crisis and Japan-US trade friction July - August 1995 3 Yen appreciation due to the Mexican currency crisis and Japan-US trade friction July - August 1995 3 crisis and Japan-US trade friction November 1997 5 Rupia depreciation due to spread of the Asian currency crisis June 1998 1 Yen depreciation due to Japan's nonperforming loan problem September 2000 1 Euro depreciation p p March 2011 1 Yen appreciation in the aftermath of the Great East Japan Earthquake

(3) Support of emerging Asia’s (3) Support of emerging Asia’s exchange rate stability exchange rate stability

Japan regards emerging Asia’s currency and Japan regards emerging Asia s currency and financial stability as vital

• Japan took initiatives to support crisis affected

countries during the Asian financial crisis of 1997-98

• Currency intervention to support the rupiah in 1997

Thailand Indonesia & Korea which went to IMF

• Thailand, Indonesia, & Korea which went to IMF
• Malaysia which did not go to IMF, but went to WB
• Japan proposed the creation of an Asian monetary

Japan proposed the creation of an Asian monetary fund (AMF) in 1997

• Japan took lead in creating ASEAN+3 processes
• CMI/M, ERPD, ABMI, AMRO, CGIF
• During the GFC, Japan expanded currency swaps

and supported Indonesia and supported Indonesia

• Japan did this while maintaining a free float

Indonesia and Korea were severely affected Indonesia and Korea were severely affected i 1997 i 1997 98 98 in 1997 in 1997-98 98

Indonesia Korea

26 14000

Korea

75 1600 1700 22 24 10000 12000 55 65 1400 1500 1600 18 20 6000 8000 35 45 1100 1200 1300 14 16 18 2000 4000 15 25 800 900 1000 14 1 9 9 7 M 1 1 9 9 7 M 4 1 9 9 7 M 7 1 9 9 7 M 1 0 1 9 9 8 M 1 1 9 9 8 M 4 1 9 9 8 M 7 1 9 9 8 M 1 0 1 9 9 9 M 1 1 9 9 9 M 4 1 9 9 9 M 7 1 9 9 9 M 1 0 2000 15 1 9 9 7 M 1 1 9 9 7 M 4 1 9 9 7 M 7 1 9 9 7 M 1 0 1 9 9 8 M 1 1 9 9 8 M 4 1 9 9 8 M 7 1 9 9 8 M 1 0 1 9 9 9 M 1 1 9 9 9 M 4 1 9 9 9 M 7 1 9 9 9 M 1 0 800 Foreign Exchange Reserves (LHS) Rupiah Exchange Rate (RHS) Foreign Exchange Reserves (LHS) Won Exchange Rate (RHS)

A rapid (temporary) loss of reserves and A rapid (temporary) loss of reserves and & i h d i i i 2008 & i h d i i i 2008 2009 2009 won & rupiah depreciation in 2008 won & rupiah depreciation in 2008-2009 2009

Korea Indonesia

260 270 1400 1500 60 12,000

Korea Indonesia

240 250 1300 1400 55 11,000 210 220 230 1100 1200 50 10,000 190 200 210 900 1000 40 45 9 000 2 0 0 7 M 1 2 0 0 7 M 4 2 0 0 7 M 7 2 0 0 7 M 1 0 2 0 0 8 M 1 2 0 0 8 M 4 2 0 0 8 M 7 2 0 0 8 M 1 0 2 0 0 9 M 1 2 0 0 9 M 4 2 0 0 9 M 7 2 0 0 9 M 1 0 40 2 0 0 7 M 1 2 0 0 7 M 4 2 0 0 7 M 7 2 0 0 7 M 1 0 2 0 0 8 M 1 2 0 0 8 M 4 2 0 0 8 M 7 2 0 0 8 M 1 0 2 0 0 9 M 1 2 0 0 9 M 4 2 0 0 9 M 7 2 0 0 9 M 1 0 9,000

Foreign Exchange Reserves (LHS) Won Exchange Rate (RHS)

Source: IMF, International Financial Statistics, online

Foreign Exchange Reserves (LHS) Rupiah Exchange Rate (RHS)

• 4. Japan’s Strategy for
• 4. Japan’s Strategy for

Regional Monetary Integration Regional Monetary Integration

• Why Asian monetary

integration for Japan?

• Prerequisites of monetary
• Prerequisites of monetary

integration

• Step by step approach

(1) Why Asian monetary integration (1) Why Asian monetary integration

• Asia (eg ASEAN+3) will be the largest

for Japan? for Japan?

• Asia (eg, ASEAN+3) will be the largest

economic bloc by the second half of the 2010s and will continue to grow, while achieving g g greater economic and financial interdependence

• Such a large, integrated region will have its own

d if it ld b J ’ i t t currency, and if so it would be Japan’s interest to influence the process of monetary integration

• Creation of a stable monetary zone is anyway
• Creation of a stable monetary zone is anyway

beneficial to Japanese MNCs

• It is Japan’s interest to promote the Japanese

It is Japan s interest to promote the Japanese yen as Asia’s important international currency, at least in an Asian currency basket Question: Is Japan ready to accept its cost?

East Asia’s intra East Asia’s intra-

• regional trade

regional trade d d i i ti d d i i ti dependence rising over time dependence rising over time

70 60 65 55 45 50 35 40 30 35 1980 1985 1990 1995 2000 2005 2010

East Asia EU-15 EU-27 NAFTA

Source: International Monetary Fund, Direction of Trade Statistics

GDP growth rate correlations are rising GDP growth rate correlations are rising between Japan and ASEAN China Korea between Japan and ASEAN China Korea between Japan and ASEAN, China, Korea,.. between Japan and ASEAN, China, Korea,..

(10-year moving windows)

0.7 0.8 0.9 1.0 0 2 0.3 0.4 0.5 0.6

• 0.2
• 0.1

0.0 0.1 0.2

• 0.6
• 0.5
• 0.4
• 0.3

0.2

• 0.7

1990 1995 2000 2005 2010

ASEAN - China ASEAN - India ASEAN - Japan ASEAN - Korea China - India China-Japan China - Korea India-Japan India-Korea Japan - Korea Source: International Monetary Fund, World Economic Outlook, database

Fear of RMB dominance?

• Another driving force behind Japan’s interest in Asian

monetary integration may be a fear of RMB dominance

• Given that China’s economic growth will continue and

the authorities promote RMB internationalization, some J f th t ASEAN d K Japanese fear that ASEAN and even Korea may become part of a RMB bloc in the not-so-distant future

• Hence Japan should play a proactive role in creating
• Hence, Japan should play a proactive role in creating

an Asian monetary zone in a way that is consistent with Japan’s commercial and economic interests p

• From this perspective, ACU (a basket of ASEAN+3

currencies plus HK dollar) is an attractive option for Japan as it allows the yen to play a role in the basket

• Another option is for Japan to become the UK in

E thi i h d d t b b fi i l Europe; this is hard and may not be beneficial

No dominant currency for a while…

Dollar, yen or yuan as an anchor for East Asia?

• Relying solely on the US$ is not feasible in the LR

y

Relying solely on the US$ is not feasible in the LR

• The yen (failed internationalization, size relatively

declining) or the yuan (inconvertible, weak prudential i i i d d l b k) l supervision, non-independent central bank) alone cannot assume a nominal anchor currency role

• The yen the yuan and other important currencies
• The yen, the yuan and other important currencies

can share the nominal anchor role for East Asia

Currency basket system y y

• SDR-plus currency basket (dollar, euro, pound, yen

plus Asian currencies): Singaporean model ACU b d t l d h d t t bli h

• ACU-based system: complex and hard to establish

internal anchor for now, but potentially a useful starting point starting point

(2) Prerequisites of monetary (2) Prerequisites of monetary

• High degrees of economic and financial integration

integration integration

• High degrees of economic and financial integration

(a region-wide FTA, customs union, regulatory harmonization, competition policy, capital account , p p y, p liberalization)

• Macroeconomic convergence (inflation, fiscal policy,

public debt, exchange rates)

• Structural convergence (per capita income, financial

t d l t h it l d l t ) sector development, human capital development,..)

• Institutional coordination (credible central banking,

financial sector regulation fiscal discipline ) financial sector regulation, fiscal discipline,…)

• Lessons of the euro crisis: Avoidance of domestic

financial imbalances coordination of fiscal policy financial imbalances, coordination of fiscal policy, crisis management system

Asia has a long way to go

• East Asia has not achieved macroeconomic or

structural convergence

• For many emerging and developing economies,

the first priority is to pursue macroeconomic institutional reforms so as to strengthen institutional reforms so as to strengthen macroeconomic policymaking to promote sound macroeconomic performance

• The next priority is to continue to pursue structural

reforms so as to strengthen domestic economic and structural fundamentals and help achieve and structural fundamentals and help achieve convergence towards developed country levels

• Achieving a fiscal union or a social union is out of
• Achieving a fiscal union or a social union is out of

the question at this point in Asia; Asia should aim to achieve a limited monetary union in the f long run without a fiscal or social union

(3) Steps for closer exchange rate (3) Steps for closer exchange rate policy coordination policy coordination policy coordination policy coordination

Progress Exchange rate li Supporting i tit ti Trade- i t t policy institutions investment Current State

Uncoordinated exchange rate arrangements CMIM, AMRO, regional surveillance Fragmented,

• verlapping FTAs
• 1. Intensive policy

dialogue on exchange rates

Intensive policy dialogue

• n exchange rates; use of

an ACU index for surveillance AMRO as a powerful secretariat for ERPD and CMIM Coordination of rules & provisions among FTAs

• 2. Informal coordination

(exchange rate regime choice)

Greater exchange rate flexibility vs. US$; A wider currency basket (SDR plus) as loose reference Asian monetary fund An East Asia-wide FTA (ASEAN+3 or +6); East Asian Investment Area

choice)

plus) as loose reference Investment Area

• 3. Formal but loose

coordination (exchange rate policy)

A wider currency basket system with clear rules for intraregional rate stability Very short-term liquidity facility Asian customs union, Asian single market (goods,

(exchange rate policy)

services, capital)

• 4. Tight coordination

(monetary policy)

ACU-based system: Asian Snake” or “Asian ERM” ACU clearing and settlement system Asian regulatory policy integration

• 5. Full coordination

Asian monetary union Asian central bank Fully integrated institutions & policy

Step 1: Intensive policy dialogue

• Cultivate a culture that views exchange rates

(including misalignments) as regional matters (including misalignments) as regional matters

• Introduce an Asian currency unit (ACU) index as
• ne of the tools of regional economic surveillance
• Expand capacity & resources of AMRO as an

independent secretariat for ERPD and CMIM, with participation of both finance ministers & central participation of both finance ministers & central bank governors

• Support collective currency appreciation in the

f id i l i fl event of rapid capital inflows

• Continue to develop and deepen local-currency

bond markets bond markets

• Make further efforts to internationalize regional

currencies

Step 2: Informal coordination

• Greater exchange rate flexibility vis-à-vis the US

(regime choice)

Greater exchange rate flexibility vis à vis the US dollar, based on a wider currency basket (such as SDR plus, or a basket of dollar, euro, pound, and ACU [= yen plus emerging Asian currencies])

• Significant macroeconomic and structural

convergence not required for informal stabilization convergence not required for informal stabilization

• f exchange rates against the SDR-plus basket
• Creation of an Asian monetary (cooperation) fund

Creation of an Asian monetary (cooperation) fund (AMF) by delinking the CMIM from IMF and strengthening AMRO and ERPD

• Promotion of ACU as international reserve assets
• Real side integration desirable through the

lid ti f i l i FTA i t consolidation of various, overlapping FTAs into a single East Asia-wide FTA (EAFTA, CEPEA)

Step 3: Formal but loose coordination Step 3: Formal but loose coordination

• Adoption of an SDR-plus currency basket with well-

(exchange rate policy) (exchange rate policy)

• Adoption of an SDR-plus currency basket with well-

defined rules for intraregional exchange rate stability

• Greater macro and structural convergence required
• Possibility of Japan’s participation once sufficient

convergence is achieved

• Regional financial integration to be achieved
• Regional financial integration to be achieved
• The need for the AMF to provide very short-term

liquidity financing for frequent interventions q y g q

• Goods, services and capital market integration and

formation of an East Asia-wide customs union I tit ti b ildi t di t li i ithi th

• Institution building to coordinate policies within the

region

Step 4: Tight coordination Step 4: Tight coordination

• Tightly coordinated intraregional exchange rate

(monetary policy) (monetary policy)

g y g g stability—a la Asian Snake or ERM using ACU as a reference—supported by close monetary policy coordination and a short-term liquidity facility coordination and a short term liquidity facility

• Japan as a full member
• AMF as a clearing house of frequent currency

g q y interventions (due to short-term liquidity finance) for settling balances among the central banks, and issue

• fficial ACUs
• fficial ACUs
• Limited fiscal policy coordination, with sovereign debt

restructuring mechanisms in place

• Selection of a regional anchor country/currency

through central bank competition for credibility

• Complete exchange rate and monetary policy
• Complete exchange rate and monetary policy

coordination feasible, if ever, only in the LR

(4) Next practical steps (4) Next practical steps

Regional surveillance (AMRO & ERPD)

• Provide sufficient resources for AMRO
• Strengthen policy dialogue on exchange rate

policies among the finance ministers and central bank governors in the ERPD (and CMIM) process bank governors in the ERPD (and CMIM) process

CMIM (and an eventual AMF)

• Increase the size of the fund substantially
• Increase the size of the fund substantially
• Introduce flexible, precautionary instruments, like

IMF’s FCL & PLL

• Reduce its link with IMF over time, ultimately to

zero, by strengthening ERPD

Practical suggestions

• Create an ACU, use its index for surveillance, and

promote its assets as international reserves promote its assets as international reserves

• Support RMB internationalization and its flexibility

5 Conclusion 5 Conclusion

• 5. Conclusion
• 5. Conclusion
• For Japan, maintaining exchange rate stability in

p g g y and with emerging Asia is critical

• Asian monetary integration will be a long

y g g process as it requires macroeconomic and structural convergence in Asia as well as i ifi t fi l li di ti significant fiscal policy coordination

• Japan needs to work hard with other ASEAN+3

b t i iti t h d li di l members to initiate much deeper policy dialogue to achieve relatively stable intraregional exchange rates against external financial shocks exchange rates against external financial shocks

• The current global financial conditions should

provide impetus toward such initiatives provide impetus toward such initiatives

Thank you Thank you Thank you Thank you

For more information: For more information: For more information: For more information:

Dr Masahiro Kawai

• Dr. Masahiro Kawai

Dean & CEO A i D l t B k I tit t Asian Development Bank Institute

mkawai@adbi.org +81 3 3593 5527 +81 3 3593 5527 www.adbi.org