PROVISIONAL TRANSLATION
Preface
The Committee on Foreign Exchange and OtherTransactions established the Subcommittee on Asian Financial andCapital Markets at its 44th meeting in October last year. Sincethat time, the subcommittee has held ten meetings to discuss "therecent issues in Asian financial and capital markets." Specificallyit has discussed the causes and characteristics of the Asian currencycrises and the issues that the Asian currency and economic criseshave raised toward emerging market economies, international financialinstitutions, and Japan.
This report summarizes the opinions and viewsstated by the subcommittee members and outside experts and thesubcommittee's discussions at the ten meetings.
May 19, 1998
Introduction
The Asian countries enjoyed an extended periodof "miraculous growth" which spanned the period between1965 and 1990. The most successful economies included Hong Kong,the Republic of Korea, Taiwan and Singapore, sometimes referredto as the "four little dragons," and Indonesia, Malaysiaand Thailand which have come to be counted among the "emergingmarket economies" of Southeast Asia. These countries werealso generally successful in distributing the fruits of theirgrowth and were thus able to effectively lower domestic levelsof inequality, which at the outset was already lower than thatof other developing countries. ("The East Asian Miracle,"the World Bank, August 1993) Coming into the 1990s, the economiesof this region continued to enjoy high growth rates. There wassome concern that the Mexican currency crisis of 1994-1995 wouldadversely affect this region, but these fears did not materializeand the region began to be widely referred to as the "growthcenter for the global economy." Factors contributing to theregion's outstanding growth record include a diligent and high-qualitylabor force, high savings ratios, and direct investments fromJapan and other advanced economies.
A major reversal in the fortune of theseeconomies began in July 1997 when Thailand was struck by a currencycrisis and widespread economic troubles. In a very short periodof time, the crises spawned in Thailand spread throughout a vastregion from Indonesia in the south to South Korea in the north.While the extent of crisis differed from one country to another,the Asian economies in general were brought face-to-face withserious difficulties. Following the crises, the same economicstructures and institutions which until a short time ago werebeing lauded as the key to the region's success have now comeunder scrutiny as the alleged source of these troubles. BecauseAsia has come to hold such an important share in the world economy,troubles in this region have cast a long shadow over the entireglobal economy, including the economy of Japan. The Asian currencycrises were born in an environment marked by the globalizationof financial and capital markets and the movement of massive capitalacross national borders, and can be characterized by the abruptand dramatic reversal in the private capital flows generated bya change in the market participants' perceptions of the investmentenvironment. For these features, the crises are being referredto as the "21st century-type" currency crises.
As the currency crises and economic turmoilcontinued, international financial institutions (IFIs) and theadvanced economies, including Japan, came forward to provide financialsupport the affected countries. However, as the crises grew toa scale which exceeded any earlier expectations, these financialsupport packages became subject to extensive debate and discussion.
No doubt, the Asian countries need to returnto a path of sustained economic expansion to enhance well-beingof their growing populations and to continue to build up theirsocial infrastructures.
Since the outset of the Asian crises, Japanhas provided the largest amount of bilateral assistance ever extendedto countries experiencing currency crises and has taken a leadershiprole in establishing an international assistance framework forAsia. This reflects the fact that Japan is Asia's largest economicpower and is integrated to this region through deep economic,political and cultural ties. Japan stands to be directly affectedby whether or not the Asian region is able to recover successfullyfrom the current crises. A return to a path of sustained and stablegrowth and continued improvement in Asian living standards willcertainly have a significant positive impact on the Japanese economy.As such, developments in this region now rank among Japan's mostimportant concerns.
The Subcommittee has analyzed the causesof the Asian currency crises from this perspective while attemptingto develop a fuller understanding of background factors and thevarious issues and questions which have surfaced as a result ofthe crises. The Subcommittee has also summarized its discussionsregarding problems which must be resolved in order for the Asianregion to return to a sustained growth path, and issues whichmust be addressed to prepare for future recurrences of similarcrises.
Note: In this report, the term "Asia"is used to denote the Pacific coastal regions of East Asia fromSouth Korea in the north to Indonesia in the south.