TOKYO, July 3 (UPI) -- When finance ministers and central bankers from Europe and Asia meet in Copenhagen this weekend, they are likely to reconsider establishing an international agency solely geared towards preempting financial crises in Asia, a senior Japanese government official said Wednesday.
The possibility of establishing an Asian Monetary Fund was first raised in 1997, when East Asia faced a financial meltdown as foreign investors rapidly retreated from Thailand, which in turn had the domino effect of overseas capital fleeing from the entire region, particularly Indonesia and South Korea. The contagion spread as far as Russia by 1998, and there had been grave concern in the late 1990s that there would be a severe global economic slump as a result.
It was during that time of heightened concern about a widespread financial meltdown that the Japanese government proposed setting up something similar to the International Monetary Fund, but concentrating only on bailing out Asian countries in need of financial assistance.
While some nations welcomed in principal the establishment of a so-called Asian Monetary Fund, most objected to Japan's insistence that it take the lead in founding such an organization.
The idea of establishing an Asian Monetary Fund at that time thus "was unlikely to survive under such circumstances," said Yutaka Yamaguchi, deputy governor of the Bank of Japan. "But that has been new light since, and there is a potential for such an idea playing a major role (in ensuring financial stability in the region) going forward," Yamaguchi said at a luncheon at the Foreign Correspondents' Club of Japan.
He added, however, that more talks would be needed to make any such proposal a reality and made no comment on what role Japan could play should such an agency be established.
Certainly, Japan had been eager to take on an active role in international finance as its economic power increased. Indeed, in the development assistance community, it is a well-known fact that the presidency of the Asian Development Bank has been guaranteed to go to a national since the bank's establishment, just like the IMF as well as the European Bank for Reconstruction and Development are always headed by a European while the World Bank is an assured post for a U.S. national.
The urge to boost political as well as economic leverage in the international community is thus nothing new nor unique to any one country. But the financial turmoil sweeping across Asia in the late 1990s was seen by some Japanese policymakers as an opportunity for Japan to increase its influence in the region, and several senior government officials including the then Finance Minister Kiichi Miyazawa proposed that the Japanese yen take on a greater role as the unofficial common currency of East Asia.
One key argument was that Japan was the single largest financial aid provider to Asian nations, and given that the bulk of the loans were made in Japanese yen, it would be easier for countries to increase their yen holdings and pay back Japan in yen, thereby averting the risks stemming from fluctuations in the foreign exchange market.
While it is unlikely that financial leaders from the 15 member countries of the European Union and 10 Asian nations, namely Japan, China, South Korea, Malaysia, Singapore, Indonesia, Brunei, Thailand, Vietnam, and the Philippines, will come up with any concrete proposal to make plans for an AMF a reality, investors will be keeping a wary eye on what role Japan and the Japanese yen could play in such an agency.
Meanwhile, prospects for the Japanese economy remain uncertain at best, according to the Bank of Japan's deputy governor.
Yamaguchi noted that the yen's decline against the U.S. dollar, particularly until this spring, had boosted exports and improved Japan's near-term growth prospects. A weaker yen makes Japanese exports less expensive and thus more competitive in overseas markets. But at the same time, Yamaguchi pointed out that export-led growth only had a limited impact both in length and breadth.
An export-led recovery "will not bring about immediate recovery and a rebound in profit to sectors isolated from exports," namely the non-manufacturing sector and the smaller-sized enterprises, which in actual fact make up the bulk of Japanese businesses, Yamaguchi said.
For a broader and sustained economic recovery, "there needs to be structural changes ... particularly in the banking system," he added. To that effect, Yamaguchi said that the banks must boost efforts to get rid of the ever-increasing mountain of bad loans once and for all.
According to the Japanese Bankers' Association, the nation's 133 banks collectively hold over $340 billion (40.95 trillion yen) in bad loans, which has kept them unwilling to make new loans, thus stifling the credit access of potential businesses.
But while Yamaguchi was quick to point out that boosting exports was not the solution to ending nearly 12 years of little or no growth in Japan, he also made of point of emphasizing that the Japanese central bank had done all it could to stimulate growth, and with some success.
Specifically, the deputy governor noted that Japan's zero-interest rate policy was not in itself a reason for the country's deflationary spiral, which many economists have said has further curtailed incentives to boost spending, given that consumers and businesses alike expect prices to continue to slide still further.
Moreover, Yamaguchi defended the Bank of Japan's so-called quantitative easing policy adopted earlier last year, whereby the central bank injected funds into the banking system and effectively flooding markets with cheap money. The logic had been that there would be greater incentive to spend the readily available money, which in turn would spur growth within Japan, but that has not been the case thus far.
Yamaguchi said that the BOJ's policy has had little impact on bolstering the economy due to the structural problems facing the Japanese economy, particularly the banking system, although he declined to comment on just how that problem could be tackled.
Meanwhile, he dismissed suggestions that the BOJ intervene in the financial markets, namely by buying up real estate and stocks, in order to inflate the value of interest-bearing assets and thus stimulate the economy, adding that such moves would be excessive micromanagement on the part of the central bank.
