Yen Bloc: Toward Economic Integration in Asia

Preface

Interest in the formation of a yen bloc has increased in recent years against a background of a deepening economic interdependence between Japan and its Asian neighbors and a growing recognition of the need to reform the prevailing international financial architecture. The onset of the Asian currency crisis, the introduction of the euro in Europe, and the implementation of Japan’s financial reform program dubbed the Big Bang, in particular, have aroused active discussions on the issue among policymakers in both Japan and Asia’s developing countries.1 The term yen bloc is used here to refer to a grouping of countries that use the yen as an international currency and that maintain stable exchange rates against the yen. A yen bloc does not at present exist beyond Japan’s national borders. Rather, with most of their international transactions denominated in U.S. dollars and their currencies pegged loosely to the dollar,Asia’s developing countries, it is fair to say, belong to a de facto dollar bloc. A question xiii Preface 1. This book focuses on Japan and the developing countries of Asia. The latter include the newly industrializing economies (NIEs) of Asia, members of the Association of Southeast Asian Nations (ASEAN), and China, which together are here called the Asian countries. The Asian NIEs are Hong Kong, Singapore, South Korea, and Taiwan. (They are also known as newly industrializing countries, but for the sake of consistency, the term newly industrialized economies is used throughout this book.) The members of ASEAN are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. When referring to statistics, however, Singapore is excluded to avoid double counting, while Brunei, Cambodia, Laos, Myanmar, and Vietnam are ignored because of lack of data. xiv  naturally arises as to whether the yen can, or will, replace the dollar as the key currency in Asia. My first attempt to answer this question dates back to 1992, when I argued that, given a widely fluctuating yen-dollar rate, pegging to the dollar was no longer consistent with macroeconomic stability in Asian countries and that they should peg closer to the yen by targeting a basket of currencies in which the yen carries a substantial weight.2 By reducing the exchange rate risk associated with yen-denominated transactions, such a major shift in their foreign exchange rate regime should promote wider use of the yen as a regional currency, paving the way for the formation of a yen bloc. In a book published in Japanese in 1995, I elaborated this theme further, looking at the issue from four complementary perspectives: a Japanese perspective along the lines of the internationalization of the yen; an Asian perspective based on the theory of optimal currency peg; a regional perspective applying the theory of optimum currency areas; and a global perspective focusing on a tripolar international monetary system centering on the dollar , the deutsche mark, and the yen.3 While retaining this general framework , in this volume I focus more on subsequent developments. I have arrived at my current stance on the four approaches that form the core of this book through different routes. In formulating my view of the yen bloc from a Japanese perspective, I benefited from my participation in the Council on Foreign Exchange and Other Transactions, which advises the Japanese minister of finance. As a specialist member of the council between 1997 and 1999 I witnessed the government’s stance on the internationalization of the yen change from passive to active at a time when the Asian crisis was deepening day by day. Some of my analyses and recommendations were incorporated into the council’s official report, Internationalization of the Yen for the Twenty-First Century: Japan’s Response to Changes in Global Economic and Financial Environments , submitted to Finance Minister Kiichi Miyazawa in April 1999. The Asian perspective grew out of my dissatisfaction with the traditional approach of predicting Asian growth using the U.S. economic growth rate, when I was covering the Asian economies as a business economist at the Nomura Research Institute in Tokyo in the late 1980s. In my search for an alternative leading indicator, I noted a very robust relation between the yendollar rate and Asian economic growth, which obviously hinged crucially on the fact that Asian currencies were to one extent or another pegged to the 2. Kwan (1992). 3. Kwan (1995a).  xv dollar. I then asked, What...