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Japan “Yen Block“ and Asian Monetary Fund

Daniel Novotný Daniel Novotný / Ed. 15. 11. 2015

Japan’s Role in the Attempt to Establish a Regional Monetary Structure

During the closing decade of the 20th century our world had changed substantially. The rather clear-cut order of international relations as designed by the victorious powers during and after the World War II. has not been completely scuttled yet, but experienced far-reaching changes in its structure. Now, at the outset of the new millenium, international politics seems to be shaped by a new pattern of relations among the main power-players. The so-called „international community“, term being coined especially by the Western countries, is passing through a two-fold process of its transformation. On the one hand, our planet is getting smaller with the advancement of Internet, new communication technologies and booming air-traffic. This world is increasingly more interconnected and hence a new perspective of international relations is looming – each single country could theoretically be affected by something that occured in any, even far-distanced, place on Earth. Today there is a talk about global responsibility and accountability. In today’s emerging „global community“ our private destinies are increasingly intertwined, merging into one sole common destiny.

On the other hand, virtually in every corner of the world regionalism takes root as if it sought to counterbalance the process of globalization. Mercosur in Latin America , ASEAN in Southeast Asia, NAFTA in North America or European Union likewise, all these great, either already firmly established or just emerging, trade blocks will inevitably by taking part in forming economic and political relations of the 21-st century. This tendency has been perpetuated to a great degree in Asia . „With regional integration, your home economy becomes more competitive and is better able to cope with globalization,“ says Horst

Kohler, Managing Director of the International Monetary Fund (IMF). The hegemony of this world-wide operating institution has been challenged over the past couple of years by a potential threat emenating from Asia. „Countries in Asia should think carefully about establishing an independent Asian Monetary Fund,“ [1] cautions Mr.Kohler.

The idea to establish a regional Asian Monetary Fund was brought to light amid the economic and monetary crisis that hit Asia so badly in 1997. About 70 years earlier, a similar crisis, though considerably more savage and disasterous, prompted establishing the International Monetary Fund and the World Bank. The breakdown of the world economy during the 1930s followed by the horrors of WWII. led the Allies to seek a new framework for the international system. That system, many Americans believed, required an end to economic nationalism, trade barriers, and currency problems that had led to depression and war. Most postwar planners defended the „open door“ to trade. At a 1944 meeting at Bretton Woods, a resort in New Hampshire , the Americans had created these two economic organizations: the International Monetary Fund and the International Bank for Reconstruction and Development, also termed the World Bank. The IMF would promote trade by stabilizing national currencies while the WB would invest in economic growth. Since the U.S. supplied most of the capital for both organizations, it would also dictate policy. These two economic organizations, that has been at the core of the international system for over half a century, were thus brought under scrutiny in late 1990s in Asia ground down by the worst economic and monetary crisis in decades. An Asian Monetary Fund would be, according to Joseph Stiglitz, former chief economist at the World Bank, „far more attuned to the economic needs of the region than the IMF in distant Washington.“ [2] Nevertheless, this idea was rapidly shot down by the United States , which feared the IMF’s authority, and thereby the leverage of the U.S. , would be weakened in Asia . Although both the IMF and the

World Bank, and some other international financial institutions as well, are said to represent „global“ interests, they have been, in effect, always heavily dominated by the United States. The U.S. excercise its power and influence in the world through this web of specialized organizations by carrying out „continuous bargining, dialogue, diffusion, and quest for formal consensus…“ [3] Seemingly, the time to effectively confront the pre-dominance of the United States and its close Allies, Europe and Japan in the international economic system is not ripe as yet. But the process of its transformation towards a system, in which Asia will have a bigger say, has already been set off.

The scheme to create an Asian Monetary Fund was seen as a kind of supplement to the IMF, just as the Asian Development Bank (ADB) reinforces the World Bank. „The ADB is a multinational development finance institution dedicated to reducing poverty in Asia and the Pacific,“ claims this institution’s web-site. Established in 1966, ADB is now owned by a number of members, mostly from the region. In 1966, when ADB was established, it had 31 members. Over the years its membership has grown to 59, both within and outside the Asian and Pacific region. 16 member states are highly industrialized countries from Western Europe and the United States and Canada. Japan is one of the two largest and therefore most influential shareholders in ADB. The other is the United States . Japan has been the top contributor to ADB’s Special Funds, such as the Asian Development Fund, ADB Institute Special Fund, and Japan Special Fund. Another paramount Special Fund was set up in March 1999 as a part of the so-called New Miyazawa Initiative. The fund termed Asian Currency Crisis Support Facility (ACCSF) was funded entirely by the Government of Japan and was designed to serve as financial assistance to countries in the region most affected by the Asian financial crisis: Indonesia , Republic of Korea, Malaysia , Philippines, and Thailand . [4]

This Miyazawa Plan, in fact, elicited U.S. approval, largely because it provides aid that is conditional on advancing Washington ’s agenda for Asia. It involves rapid liberalization, deregulation and privatization. Generally, apart from the Miyazawa Initiative, Japan has turned out to be a big disappointment to many governments all around Asia . The first major disillusionment occured a few months into the financial crisis in 1997. Tokyo then proposed the establishment of the Asian Monetary Fund, or AMF, which was seen by many Asian countries as a new innovative approach to the currency crisis and regional Asian economic agenda in general. The Fund, as proposed, would have been capitalized from the reserves of the central banks of Japan , China , Taiwan, and Hong Kong . The AMF was designed to help governments whose currencies were under attack to protect their national financial markets from the speculators. [5] Nonethless, the U.S. opposed this idea asserting that it would weaken the ability of the International Monetary Fund to „extract reforms“. The United States took advantage of the situation when the Asian countries were weakened by the crisis, and relentlessly pushed its agenda of opening up trade and financial markets. In other words, what is good for American banks, speculative investors and, chiefly, for long-term strategic interests in Asia , is good for the rest of the world as well. The remaining potential counterweight to the U.S. domination of the financial agenda is Japan, but it has so far refrained from providing a real leadership on behalf of Asian interests. Since the proposed Asian Monetary Fund was rebuffed, Japan has largely danced to the American tune to the degree, to which it had done ever since it was defeated in the World War II. Japan is essentially an American protectorate, for it is firmly bound to the U.S. with a set of firmly rooted bilateral political and military ties. Unchallenged by Japan and Europe as well, the United States has on the whole dominated the global political agenda to date.

Asian countries seem to be a long way from establishing an Asian Monetary Fund, as some politicians in the region would like. But, significantly, it was the Asian Development Bank that grasped the initiative. At its annual meeting in northern Thai city of Ching Mai in May 2000, finance ministers from 13 countries agreed to push ahead with a plan to help each other in the event of a currency run. The Chiang Mai Initiative is based on an agreement to swap foreign-exchange reserves to fend off any future financial crises. It could be seen as another attempt to tackle the issue of regional cooperation. At this stage, Japan both initiated and took lead in this new-inaugurated process, as it had learnt from the missed opportunity to create an Asian Monetary Fund in 1997. Japan hopes to forge the new currency-swap system based on two bilateral deals it struck with South Korea and Malaysia in 1999. These agreements enable central bank of Japan to swap its „yen“ reserves in cash with the central banks of South Korea and Malaysia respectively for their local currencies. [6] This recent creation of a network of currency swaps effectively represents the beginning of a new era of monetary regionalism in Asia . It kicked off a long process of building regional economic institutions, in the course of which an Asian Monetary Fund or a similar regional financial institution will eventually appear again on the agenda of Asian policymakers. Although Japanese Finance Minister Kiichi Miyazawa said at a press conference in Chiang Mai that the new agreement is not repackaged AMF [7] , yet it is clear that Japan has never relinquished the idea of regional framework for financial cooperation of some sort. It is thus a matter of time when the idea of setting up the Asian Monetary Fund is brought up again.

Also Singapore ’s senior minister, Lee Kuan Yew, supports the idea of the Japanese yen playing a bigger role in trading and currency reserve arrangements among members of the ASEAN. „This may be to the advantage of Southeast Asia because much of the intra-ASEAN and intra-East-Asian trade can be done in yen,“ Lee said. „Much of the borrowings of Indonesia , Malaysia and Thailand have been in yen. So it is not unwelcomed.“ The idea of allowing foreign-exchange reserves to be swapped, which Japan

helped shape, is seen as a first step toward the possible establisment of an Asian Monetary Fund, concludes the journal Far Eastern Economic Review. [8] Yet despite Japan’s pivotal role in promoting the regional cooperation, beginning with its proposed Asian Monetary Fund in August 1997, it was lack of Japan’s willingness to provide leadership of that effort that created the biggest problem. Apart from the noisy and fierce opposition of the United States and Europe , it was also an increasingly strong voice from within the region that reinforced Japan’s unwillingness to act as both a foothold and a booster to this AMF proposal. It is China ’s growing political and economic clout and concurrently its resistance to that idea that effectively wrecked that scheme. In the course of the 1990s, China had established itself as a major powerplayer in Asia , competing with Japan for pride of place in the region. While the strained relationship between these two giant countries complicates political and security issues, the ambition of Asia’s two largest economies to aspire to the „leader“ of the region permeates into the realm of money, thereby preventing either one from taking the lead on financial issues. Although it has painstakingly sought to prevent Japan from taking the helm, China itself is not suitable for steering the Asian ship either. China , as a nominally communist nation, combined with its economic backwardness, would be hardly acceptable for most of Asian countries, if any, as a leading nation steering regional affairs. To make things more complicated, besides China not willing to yield regional economic leadership to Japan and vice versa, South Korea , too, is not poised to play second fiddle to either Japan or China . The Ching Mai Initiative has brought in a new approach to resolving this tricky Catch 22. The platform for the new arrangement has been made up of ASEAN, the 10-member group with a long record of political and economic cooperation and institution building. To bypass mutual differences and inherent distrust in Northeast Asia, Japan, China and South Korea were thus attached to the ASEAN as a part of the „ASEAN+3“ process. The „ASEAN+3“ framework should make it easier to keep the discussion of regional financial arrangements on track and moving ahead. Since ASEAN is nominally in charge, the persuit of leadership within the „ASEAN+3“ is hence off limit to both Japan and China, and South Korea can partitipate as a peer to its gigantic neighbours. This set-up is featured by another asset, of not including

Hong-Kong and, most importantly, Taiwan , which is a sticky issue in China’s dealings in other organizations such as Asia-Pacific Economic Forum. [9] It is a big question as to whether or not this project will eventually be succesful. The progress could be hampered, for instance, by applying the principle of non-interference in member states’ policies that is so strictly adhered to among the ASEAN states. Furthermore, the partitipating countries might not be able to make headway with the currency-swap project due to the lack of political will to set economic convergence targets within ASEAN or, on a larger scale, within „ASEAN+3“, which is an indispensible part of this process.

Horst Kohler, the IMF’s top-ranking figure, supports the Ching Mai financial co-operation initiative. „Asians should do everything, even up to monetary union, to enhance and to accelerate regional cooperation and integration,“ he says and adds that „monetary integration should be based on convergence … that starts with free trade, with the harmonization of statistics and tariffs…“ [10] Equally, for Heribert Dieter, senior research fellow at the University of Duisburg, Germany, the agreement to swap foreign-exchange reserves represents the first step in the right direction towards monetary regionalism. „The creation of a regional liquidity fund will provide the functional basis for further cooperation.“ He argues that, at the second level, there could be a regional monetary system and the cooperation could proceed as far as an economic and monetary union. [11] Even the article in the magazine Time, with a provoking title „Will Asia Get a Euro?“, mentiones a single Asian currency as a long-term goal. [12] On the one hand, in the future no government in Asia is likely to peg its national currency to the U.S. dollar, on the other neither the ASEAN, nor any other broader grouping

of Asian states, with its widely divergent economies, is by any means ready to form a monetary union epitomized by a common currency. Horst Kohler suggests that Asian countries should establish the vision of monetary union today. However, „it is a long process, it took Europe 50 years.“ [13] As far as political, economic and institutional integration is concerned, not to mention a number of unresolved disputes in the East- and Southeast Asia , the region is logging behind Europe by couple of decades, if not generations. Besides artificially moulding a regional currency, the other option would be to promote one local currency up to the „single Asian currency“ status. But with two major political and economic powers – Japan and China – each one craving to get the upper hand in shaping of the Asian affairs, the later outcome does not appear very likely either. At some stage, Japan ’s economy might not be big enough in the view of the steadily growing Chinese economy adding about 8% GDP each year. Unlike the Chinese folk, Japan ’s population has been stagnating or even dwindling for at least the past decade, which will consequently constrain its future economic growth. But on the other hand, China’s relatively low level of economic development, nascent financial structure, the desperately undeveloped regions like far west, coupled with uncertain political stability propped up by its infamous communist regime, that wields hardly any credibility across Asia – all these factors combined would currently rule out dominance of the Chinese currency, the renmimbi.

In any case, the countries partitipating in „ASEAN+3“ are undoubtedly going to attempt to fully implement the Ching Mai agreement and to gradually extend it by building a more sophisticated and comprehensive regional monetary structure upon it. A coordinating financial institution, a local supranational body to oversee and harmonize national economic policies, be it called Asian Monetary Fund or otherwise, will sooner or later be established. East Asia has the financial means to implement a regional liquidity fund, as in March 2000, the central banks of ASEAN countries, together with China, Japan and

South Korea , collectively had foreign reserves of well over $800 billion. By comparison, the entire Eurozone currently has foreign reserves of about $340 billion. [14] Because Japan’s economy is so large, its reserves so massive – $304 billion – because it is keen to curry favour in the region, and, importantly, becauseit has had a rather democratic, relatively stabil and thus credible political system spanning well over half a century, „yen“ is likely to be at the core of any such arrangement. [15] Launching any major regional monetary institution would surely require China ’s approval, because of its perpetually growing economic and financial leverage and political influence in Asia . Bejing’s central bank, together with Hong-Kong’s monetary authority, wield more then enough liquidity reserves to be able to actively partitipate in any such large-scale project. China would not tolerate being excluded from it, for, in the time to come, it wants to keep a close eye on Asian affairs. As for now, Chiang Mai accord gives Southeast and Northeast Asia a basic structure. If the proposed arrangements are succesfully implemented, and the process is carried on, Asia will have the historical chance to free itself substantially from the traditional dominance of the West and West-run „international“ institutions.

In the 1970s and 1980s, Japanese „yen“ emerged on the global stage heralding arrival of the economy of „the land of rising sun“ among the world’s leading industralized nations. Japan ’s high-paced development in that period had a marked impact on the global economy, whereupon the explosion in yen trading entailed a major shift in global financial markets. The Olympic Games in Tokio in 1964 were meant to crow Japan ’s success into the world, as much as they were to proclaim this country’s brake-up with its disgraceful past. In another 20 ar 30 year’s time, China ’s historical records may have replicated much of Japan ’s modern history development. The magazine Time writes on July 23, 2001 : „Chinese see the Olympics as the coming-out party for a once-great civilization hit by a bad couple of

centuries, starting with the Opium War and stretching through the 1950s when 20 million people starved to death. Now, they want a bit of credit both for the astonishing riches their hard work has produced and for their country’s reemergence as a world power. Playing Olympic host, along with China ’s expected acceptance into the World Trade Organization, are two markers of the country’s triumphant arrival.“ [16] Under the terms of the WTO agreement Beijing is obliged to open its domestic banking industry to international competition within five years of joining the organization. At this point, the economy of the „Middle Kingdom“, and its currency, the now fully convertible renminbi, will very likely assume major importance on the world stage. The renminbi could soon become the world’s fourth heavily traded currency, behind the U.S. dollar, the euro and the yen. Withing a few years, trading volumes in the Chinese currency could eclipse the yen in the international foreign-exchange markets as China establishes itself, much like Japan half a century ago, as one of the world’s greatest trading nations. [17] By that time, China might have already outstripped Japan ’s economic power and political clout within the region. Zbigniew Brzezinski comments China’s standing as „a significant regional power that is likely to entertain wider aspirations, given its history as a major power and its view of the Chinese state as the global center.“ He goes on to predict that „ China is already beginning to affect the geostrategical distribution of power in Asia, while its economic momentum is bound to give it both greater physical (military – author’s remark) power and increasing ambitions.“ [18] As to Japan ’s role in the regional affairs, Brzezinski argues that „it possesses the potential for the excercise of first-class political power. Yet it does not act on this, eschewing any aspirations for reigional domination and preferring instead to operate under American protection.“ [19] In the upcoming decades, it is the U.S. and Japan , that will pose the major threat to China ’s aspirations, and it is in the interaction within this peculiar triangle that

Japan ’s and China ’s role in the economic and monetary structure in Asia will be defined. In the 1980s and 1990s, peaking during the Asian economic crisis in 1997, Japan failed to establish a regional yen-based currency block supervised by an Asian Monetary Fund. China in the 21-st century may have more success. In this century, the West is set to further control the „international“ institutions, yet Asia, led by either Japan or China or, most likely, by both of them (whereby the one-billion-head India has not said its last word yet), will seek to shape monetary regionalism to boost its financial muscle to promote its own, Asian interests in the increasingly globalised world.


  • Holland, Tom: „Latin Lesson“, Far Eastern Economic Review, 28 December 2000
  • Bowring, Philip: „Will Asia Get a Euro?“, Time Asia, 1 February 1999
  • Goad, Pierre: „Asian Monetary Fund Reborn“, Far Eastern Economic Review, 18 May 2000
  • „Swapping Notes“, The Economist, 13 May 2000
  • Bello, Walden: „Inviting Another Catastrophe“, Far Eastern Economic Review, 12 August 1999
  • Holland, Tom: „The Day of The Renminbi“, Far Eastern Economic Review, 30 November 2000
  • Forney, Matthew: „Beijing Bags It“, Time, 23 July 2001
  • Dieter, Heribert: „Asia’s Monetary Regionalism“, Far Eastern Economic Review, 6 July 2000
  • „Singapore’s Lee Backs Yen Block“, Far Eastern Economic Review, 8 June 2000
  • Brzezinski, Zbigniew: The Grand Chessboard, New York, HarperCollins Publishers, Inc., 1997
  • „Asian Monetary Fund Risky Option, IMF Head Says“, Far Eastern Economic Review, 6 June 2001, under www.feer.com
  • Asian Development Bank – official web-site, under www.adb.org

[1] „Asian Monetary Fund Risky Option, IMF Head Says“, Far Eastern Economic Review, on www.feer.com, 6 June 2001
[2] Holland , Tom „Latin Lesson“, Far Eastern Economic Review, 28 December 2000
[3] Brzezinski, Zbigniew The Grand Chessboard, New York , HarperCollins Publishers, Inc., 1997, on the page Nr. 28
[4] preceding information and data were excerpted from the Asian Development Bank – official web-site, under www.adb.org
[5] Bello , Walden „Inviting Another Catastrophe“, Far Eastern Economic Review, 12 August 1999
[6] „Swapping Notes“, The Economist, 13 May 2000
[7] Goad Pierre „Asian Monetary Fund Reborn“, Far Eastern Economic Review, 18 May 2000
[8] „ Singapore’s Lee Backs Yen Block“, Far Eastern Economic Review, 8 June 2000
[9] this section dealing with the „ASEAN+3“ project is based on: Goad Pierre „Asian Monetary Fund Reborn“, Far Eastern Economic Review, 18 May 2000
[10] excerpted from the article „Asian Monetary Fund Risky Option, IMF Head Says“, Far Eastern Economic Review, under www.feer.com, 6 June 2001
[11] Dieter, Heribert „ Asia ’s Monetary Regionalism“, Far Eastern Economic Review, 6 July 2000
[12] Bowring, Philip „Will Asia Get a Euro?“, Time Asia , 1 February 1999
[13] „Asian Monetary Fund Risky Option, IMF Head Says“, Far Eastern Economic Review, 6 June 2001, under www.feer.com,
[14] data taken from: Dieter, Heribert „ Asia ’s Monetary Regionalism“, Far Eastern Economic Review, 6 July 2000
[15] „Swapping Notes“, The Economist, 13 May 2000
[16] Forney, Matthew „ Beijing Bags It“, Time, 23 July 2001
[17] Holland , Tom „The Day of The Renminbi“, Far Eastern Economic Review, 30 November 2000
[18] Brzezinski, Zbigniew The Grand Chessboard, New York, HarperCollins Publishers, Inc., 1997, on the page Nr.44
[19] Brzezinski, Zbigniew The Grand Chessboard, New York, HarperCollins Publishers, Inc., 1997, on the page Nr.45
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