2.Global Efforts to Strengthen InternationalFinancial System
(1) Report by G7 finance ministersto the Cologne Summit in June 1999
Based upon the understanding thatin order to reduce the risk of currency andfinancial crises it is necessary to reform theinternational financial system, G7 financeministers issued a report entitled"Strengthening the International FinancialArchitecture" at the Cologne Summit.
This highly comprehensive reportcovered the following matters.
- Strengthening and reforming theinternational financial institutions andarrangements;
- Enhancing transparency and promoting bestpractices;
- Strengthening financial regulation in industrialcountries;
- Strengthening macroeconomic policies andfinancial systems in emerging markets;
- Capital control in emerging markets;
- Improving crisis prevention and management, andinvolving the private sector; and
- Promoting social policies to protect the poorand most vulnerable.
Among these the following matters,which were included in the proposals by theSubcouncil's previous report, are to be applaudedas epoch-making steps. [1] Capital accountliberalization should be carried out in awell-sequenced manner, and until the institutionaland regulatory environment in domestic financialsystems is strengthened, the regulation of capitalinflows may be justified. [2] The risk managementof financial institutions with regard to highlyleveraged institutions in industrial countriesshould be strengthened, and disclosure by thehighly leveraged institutions themselves shouldalso be improved. [3] The private sector should beinvolved in the resolution of crises asprivate-sector creditors have responsibility oftheir own investment.
| Note: | Highly leveraged institutions are those that, in spite of a having small capital base, utilize leverage (borrowed funds) to manage large volumes of funds. |
(2) Report of the FinancialStability Forum
Steps to carry out the proposalsin this G7 finance ministers' report are currentlybeing vigorously pursued in such fora as the IMF,the G-20, and the Financial Stability Forum.
Among these, the FinancialStability Forum established three working groupsto examine: [1] highly leveraged institutions; [2]capital flows; and [3] offshore financial centers,and two task forces to address [1] theimplementation of standards and [2] depositinsurance schemes. The three working groups andthe task force on the implementation of standardsissued their final reports in March 2000.
The issues examined by the WorkingGroup on Highly Leveraged Institutions included[1] the potential systemic effects arising fromthe build-up of leverage and collapse of a largehighly leveraged institution, and [2] thepossibility of the destabilization of markets inmedium-sized open economies by the speculativeactivities of highly leveraged institutions, aboutwhich the Asian currency crisis has arousedconcern. Matters about which proposals were madeincluded the following.
- Enhancing the risk management ofthe counterparties of highly leveragedinstitutions;
- Enhancing risk management within the highlyleveraged institutions themselves;
- Enhancing regulatory oversight of the creditproviders of highly leveraged institutions;
- Building a firmer financial infrastructure insuch fields as bankruptcy law;
- Enhancing public disclosure by highly leveragedinstitutions; and
- Improving the surveillance of financial marketsby the official sectors and internationalinstitutions.
A feature of the report was thatit made clear that highly leveraged institutionsshould be obliged to make full disclosure ofinformation, and although such policy options asthe direct regulation of highly leveragedinstitutions were not included in these proposals,the report states that a reconsideration of thesepolicy options would become more likely if therecommended measures are not carried throughproperly.
The above-mentioned proposalsquite closely reflect the previous proposals bythe Subcouncil, and we believe the most importantthing now is that the report's recommendations befully implemented. At the same time, however, theinternational community should continue to monitorclosely the behavior of investors who are activeinternationally, and should continue to studycountermeasures, if necessary including directregulations.
(3) IMF reform
The reform of the IMF, theinstitution positioned at the core of theinternational financial system, is indispensablefor building an international financial systemthat will not be vulnerable to currency crises. Weconsider the following aspects to be important incarrying out reform of the IMF.
| (a) | The conditionality that is required when international financial assistance is provided must above all contribute to increase the credibility of the policies of the countries receiving the assistance. In devising the conditionality it is essential to ascertain the nature of what is necessary to bring about the recovery of market confidence and the means to achieve it, aligning this with the actual circumstances in each country, including macroeconomic conditions, micro and structural vulnerability, the history of economic policies hitherto, and social institutions and restrictions. To that end it will be necessary not only to be closely coordinated and designed with the World Bank and other international financial institutions, but also to strengthen the collation and analysis of external information, not only through dialogue with the governments of the relevant countries, but also with NGOs and other bodies outside the government sector, and external experts. In addition, it is essential that involvement in the IMF's structural policies be limited to those parties that are directly connected with crisis resolution, and that there is an appropriate division of roles with the World Bank and other international financial institutions. |
(b) | It is essential that the IMF place the emphasis of its surveillance and programs on abrupt and large-scale international capital movements, and that greater importance be given to crisis prevention than to crisis management. Accordingly, it is necessary to ensure that expediting the increase in the transparency of the economic policies of member countries, including data disclosure by such means as expanding the number of countries participating in the SDDS, and promoting policy management by member countries in conformity with international standards and the Code of Good Practice, are given the status of important IMF functions. To that end it is necessary to establish a surveillance system for the state of implementation of standards and the Code on the basis of the collaboration process in Article IV Consultation.
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(c) | It is also necessary to strengthen the accountability of the IMF by enhancing its transparency and improving its policy-making procedures, including by means of increasing the disclosure of IMF board records. In addition, it is necessary to conduct systematic evaluations, both internally and externally, of the effectiveness of its operations, programs, policies, and procedures, and to ensure that these are reflected in its operations. |
(d) | The contingent credit line (CCL) was established in April 1999, member countries that the IMF deems eligible, for example by virtue of their implementation of sound policies, enter in advance into credit lines with the IMF so as to provide for situations in which they plunge into balance-of-payments difficulties that result from crisis contagion rather than from problems within the countries themselves, and they receive large-scale short-term assistance in a flexible manner if the necessity arises. It is hoped that through this financing scheme the IMF will place greater emphasis on crisis prevention, and that countries will be given a greater incentive to quickly adopt measures to avoid the risk of financial crises. However, in view of the fact that, among other things, to date there have been no cases in which this financing scheme has been used, we believe that as it stands, the scheme does not provide sufficient incentive. Therefore, reviews should be given to ways of making the scheme easier to use, for example by reducing the charges. |
(e) | For the IMF to continue to perform its central role as a truly global institution in the international financial system, it is essential that the allocation of quotas which determines the amount of members' contributions and access limits of IMF resources and is the basis for voting power for important decisions, including the election of the Managing Director reflects the reality of the world economy. Over half a century has passed since the establishment of the IMF. Despite the fact that many emerging economies, including in Asia, have become important economic powers, their international trade has increased dramatically, and their weight in international financial markets is growing, the allocation of quota shares, voting shares, and Board representation of emerging market economies have been considerably limited. By contrast, even though the introduction of a common currency in the European Union has reduced the need for international settlements, Eurozone countries have one third of the quota shares and one third of the Executive Directors. A review of quota allocation, voting shares, and number of Executive Directors to more appropriately reflect the economic realities of member countries is an important issue related to the IMF's governance and accountability. We believe that an immediate review and correction are essential. This issue is also of great importance with respect to ensuring that IMF conditionality conforms more closely to the actual circumstances of emerging market economies. |
(f) | The recent currency and financial crisis made clear that in the event of abrupt and large-scale capital flows it is necessary to ensure assistance on a considerable scale in order for IMF assistance programs to win the confidence of the markets. We believe it to be necessary both to take steps to strengthen the IMF's capital base and to develop a regional mechanism for complementing IMF assistance. In the recent crisis Japan's official assistance has carried out an important complementary function, but we believe that some kind of regional complementation mechanism is necessary. |
3. RegionalEfforts within the Asian Region
(1) Promotion of intraregionaltrade and investment
(a) Regional arrangements tocomplement the multilateral trading system
The fact that the upgrading ofindustrial structures has spread in a chain withinthe Asian economy, and also that stronginterdependence within the region has formed in anatural manner, suggests the importance ofregional efforts in carrying out theliberalization of trade and investment.
Companies in Asia are progressingwith the building of cross-border procurement,production, and sales networks within the region.In order to assure that the optimum allocation ofindustry accords with changes in comparativeadvantage, and to promote the chain of upgradingof industrial structures in the region, we believethat it would be effective to form a free-tradearea to complement the multilateral trading systembased on the WTO.
| Note: | The White Paper on International Trade 2000 gives regional integration the status of complementing the multilateral trading system based on the WTO, and points out that regional integration involving Japan is economically beneficial in light of the trends in economic analysis and economic realities such as deepening trade and investment interdependence. |
(b) Moves towards regionalagreements within Asia
In ASEAN the formation of theASEAN Free Trade Area (AFTA) will mean thattariffs among six ASEAN nations (Thailand,Indonesia, Malaysia, the Philippines, Singapore,and Brunei) will in principle be lowered to amaximum of 5% by the year 2002, and that tariffsamong all the AFTA nations will be abolishedcompletely by the year 2018. Although there may becomplications caused by the handling ofexceptional goods, we believe that it is highlylikely that the AFTA agreement will bring aboutthe creation of a free-trade area in SoutheastAsia by the year 2018. We believe that in thecourse of that, the subsequent phased expansion ofAFTA to ASEAN +3 (Japan, the Republic of Korea,China) will be an important issue to be studiedwithin the East Asian region.
In addition, study has begun intoa free-trade agreement between Japan and the NIEs,namely the Republic of Korea and Singapore, whosestage of development is close to that of Japan. Atthe summit meeting between Japan and Singapore inDecember 1999 it was agreed to begin studies onmeasures regarding a possible free-trade agreementbetween the two countries. Joint study meetingswere held in March and April 2000. Studies into afree-trade agreement with the Republic of Koreaare also proceeding in the private sector. (Japanhas signed investment agreements with China andHong Kong, and negotiations with the Republic ofKorea, Vietnam, and Mongolia are under way, andnegotiations with Indonesia are due to start.)
In 1994 APEC, the Asia-PacificEconomic Cooperation forum established in 1989(currently participated in by 21 economiesincluding Japan, the United States, and China),adopted the Bogor declaration, in which theystated that the industrialized economies achievethe goal of free and open trade and investment nolater than the year 2010 and developing economiesachieve the same goal no later than the year 2020.
Given factors such as thesubstantial differences in the stages of economicdevelopment of Asian countries and the existenceof delicate domestic political problems, informing a free-trade area in Asia it would be botheffective and realistic to adopt a multilayeredand phased approach in which bilateral free tradeagreements are combined with AFTA. We believe thatit is necessary to vigorously pursue regionalintegration in concert with the strengthening ofthe multilateral trading system and thefurtherance of regional cooperation. Some held theview in the Subcouncil that the high growth ofAsian economies was achieved through opening itseconomy to the world and forming a free-trade areain Asia should be in line with global systemsbased on the WTO.
(2) Developing regionaltrade-financing networks
During the currency crisis,because of Asian companies' heavy dependence onfinancial institutions for trade financing, thecontraction of lending impeded the export activityessential for economic recovery. Because of this,Japan, other industrialized countries, and theinternational institutions provided financialassistance to facilitate trade financing. Inaddition, Japan paid particular attention tostrengthening and promoting trade financing in theregion by providing financial and technicalassistance to governmental export-import banks,and through related measures such as strengtheningcollaboration between those banks.
Given the increasing degree ofinterdependence within Asia in the sphere oftrade, the recent currency crisis has taught Asiancountries to recognize the importance ofdeveloping trade-financing systems that cansupport sustainable economic growth. Inconsequence, many countries are taking steps toestablish or strengthen governmental export-importbanks. In our view, in order to facilitate andassure the stability of trade within the region itis important to actively foster the development ofregional trade-financing networks of this kind.
(3) Development of regionalbond markets
(a) Invigoration of the region'sinternational bond markets
The development of domesticcapital markets, particularly bond markets, is animportant issue for Asian countries to address.However, factors such as the lack of maturity ofdomestic institutional investors mean that it willbe some time yet before all of these countrieshave sophisticated bond markets, and the domesticbond markets are restricted with respect to theirscale and the availability of funds. On the otherhand, taking into consideration factors such asthe saving surpluses in the Asian region as awhole, and the future growth of institutionalinvestors in Asian countries, we believe thatthere will be growing demand for regional bondmarkets in which Asian investors can engage inpricing within the Asian time zone.
Therefore we believe that in orderto establish a mechanism to facilitate therecycling of long-term capital from countries withsaving surpluses to those with shortages in theregion, it is necessary to make region-wideefforts to develop regional bond markets,including by invigorating the region'sinternational bond markets (e.g. Tokyo, Hong Kong,and Singapore). It is noteworthy that manyparticipants from Asia pointed out in thisSubcouncil's discussions the importance ofdeveloping the regional bond markets.
(b) Issues to address
Participants pointed out that indeveloping regional bond markets it is necessaryto examine the development of new instruments forthe sharing of exchange risk by borrowers andlenders or of derivatives markets for hedgingexchange risk; rating agencies with extensiveknowledge of economic conditions in the region;credit-enhancement schemes for bond issuance;securities settlement and clearing systems; andthe promotion of the issuance of bonds denominatedin local currencies by international developmentfinancial institutions.
Regarding the development ofsecurities settlement systems in the region, weshould consider the differences among countries inthe stage of development of such systems and thefact that the building of multinational networkswill create complex systems and be costly, andwill require time for adjustments to be madebetween countries, and that in the near term thevolume of cross-border securities transactions maynot be sufficient to justify those costs. In viewof these considerations, we are interested in thephased approach adopted by Hong Kong, whichintends to have direct bilateral linkages withother securities settlement systems at a similarstage of development. (Hong Kong has builtbilateral linkages between its central securitiesdeposit institution and its counterparts in withAustralia, New Zealand, and the Republic ofKorea.)
The computerization of financialand securities transaction and settlement isdeveloping globally, and we believe that Asia'sexchanges will be able to take advantage of theirlatecomer status to build regional transaction andsettlement networks. This computerization offinancial and securities business is likely tobring great change to the present form ofbusiness, and steps such as the building of a EastAsian exchange in computer network may invigoratethe region's capital markets.
Against the backdrop of thestability of the value of local currencies sincethe mid-1980s in the European Monetary System(EMS), there has been a rapid increase incross-border transactions, namely cross-borderbuying and selling of domestically-issued bonds(particularly government bonds). In Asia in futureit will be necessary to promote such localinvestors cross-border transactions in domesticbonds, but for that it will be at first importantto ensure mutual exchange rate stability withinthe region (discussed below), and to developdomestic bond markets.
(4) Exchange rate stabilitywithin the region
(a) Examination of mechanism forregional exchange rate stability
In Europe a variety of attempts -including the EMS - were made to ensure stabilityof exchange rates within the region, until finallymonetary union was achieved in January 1999.Factors indicated as being behind this are theEuropean economy's high degree of dependence ontrade, and the strong interdependence in Europe.
In Asia, meanwhile, the dependenceon trade of many Asian countries is considerablyhigher than in pats of Europe, and as referred toabove, intraregional trade has grown to accountfor nearly 50% of total trade. In view of this, webelieve that Asia is reaching the stage at whichit should study a regional currency stabilitymechanism that will ensure that exchange rates inAsia reflect economic fundamentals, and move in astable manner. Although it will be difficult todesign a global currency stability mechanism forsome time to come, we consider that efforts shouldbe made to create one on a regional scale.
Prior to the currency crisis,Asian countries employed a virtual dollar peg,which in turn contributed to maintain thestability of exchange rates within the region, andworked for a foundation for the development ofregional trade and investment. However, thecurrency crisis exposed the risk involved inexchange rate systems virtually linked to thedollar. For Asian countries to achieve exchangerate stability in the region, it has becomenecessary to build a new exchange rate stabilitymechanism to replace the virtual dollar link, andwe believe that for this it is necessary for stepsto be taken at the regional level as well as thenational level.
(b) Multilayered and phasedapproach
In view of factors such as thesubstantial differences in the stage of economicdevelopment of the countries of Asia, whenconsidering a regional exchange rate stabilitymechanism it would - as in the case of theformation of a free-trade area - be both effectiveand realistic to adopt a multilayered and phasedapproach in which bilateral agreements andregional agreements are combined.
For example ASEAN countries haveagreed to eliminate tariffs within the AFTA by theyear 2018, thereby completing the creation of afree-trade area. Europe's experience suggests thatto foster trade and investment in a free-tradearea the stability of exchange rate in the area isas important as the level of tariffs, and thus apossible option for the ASEAN countries is to linktheir exchange rates to a common currency basket,while maintaining a sufficiently wide band. It isconceivable that, from this common basket as thestarting point, there could be a common currencyin ASEAN in the future.
Even if the ASEAN countries do notuse a common currency basket, but only act inconcert by transferring to exchange rate regimesin which their currencies are essentially linkedto a currency basket, that should contribute tomutual exchange rate stability within the region.
There was a view in the Subcouncilthat with regard to stabilizing the exchange rateof the yen against Asian currencies, an issue tobe addressed would be that of how to maintainrelatively stable exchange rates between the yenand other international currencies.
(c) Long-term perspectivetowards a common currency
Since the Asian currency crisis,the view has developed that Asia should aim tohave a common currency partly because it hasbecome clear that the linkage of East Asia'seconomies is growing.
However, compared with Europethere are considerable disparities in Asia withregard to stage of economic development and otheraspects, and economic integration within ASEAN isstill only at an intermediate stage. Factors suchas these make it unclear at this stage whetherAsian countries would derive a net benefit fromparticipating in a common currency and abandoningindependence in their monetary policies.Furthermore, there is as yet no politicalconsensus within the region as regards moving inthe direction of a common currency.
Even in Europe, where nations haverelatively close economic, historical, andcultural backgrounds, monetary union was finallyachieved only after a long period. As for theAsian region, with its greater complexity anddiversity, we believe that - setting aside thelong-term possibilities - the environment atpresent is not conducive to proceeding withmonetary union in the immediate future.
A period of some 30 years wasneeded from the time of the 1970 Werner Report,which advocated European economic and monetaryunion, to the birth of the euro in 1999. Givenfactors such as the dynamic development of theAsian economy that has occurred hitherto, we canforesee a considerable degree of convergence ofthe income levels and economic structures of Asiancountries over the long term. With regard toregional cooperation in the sphere of currencieswe consider it necessary that, from this long-termperspective, continuous strategic efforts be made.As for Japan, we believe that it shouldparticipate actively in the discussions about howthe future monetary system of the Asian regionshould be shaped.
(5) Promoting policy dialoguein the region
(a) Building networks formultilayered policy dialogue
In order to build a currencystability mechanism within Asia it is important topromote policy dialogue within the region, so asto ensure that individual countries' macroeconomicand other policies are not managed in a way thatis inconsistent with the relevant exchange ratelevel.
Also, in the course of policydialogue within the region it will be importantthat all Asian countries share expertise in suchareas as the building of frameworks for the reformof the financial and corporate sectors.
Policy dialogue within the Asianregion is currently being conducted under theframeworks of the Manila Framework and APEC. Tofoster policy dialogue further it is essential todevelop relationships of mutual trust and to buildrelationships in which frank and constructiveopinions can be shared, as is the case among themember countries of the EU, NAFTA, and the G7.This can be done by holding both bilateral andmultilateral meetings, conferences, seminars, andother gatherings at a variety of official andprivate-sector levels, where the people involvedcan have frequent face-to-face meetings and otherforms of contact.
In the course of the Subcouncil'sdeliberations, members from institutions such asuniversities and research institutes in nine Asianeconomies participated in the discussions asspecial members. It was very valuable to be ableto hear directly the views of people from otherAsian countries in this way. Those other Asianparticipants emphasized the importance of buildingrelationships of mutual trust through bothofficial and unofficial policy dialogue.
In short, to foster policydialogue further within the Asian region, it isimportant to build networks for multilayeredpolicy dialogue in various sectors, at variouslevels, and in various forms while utilizingexisting frameworks. In addition, importance ofpolicy dialogue with Australia and New Zealand waspointed out by some members.
(b) The ASEAN + 3 framework
In the Joint Statement on EastAsia Cooperation issued at the ASEAN + 3 (Japan,China, and the Republic of Korea) summit held inManila in November 1999, it was agreed to"strengthen policy dialogue, coordination andcollaboration on the financial, monetary, andfiscal issue of common interest." That was anextremely important first step towards fosteringpolicy dialogue within the Asian region.
Based upon a Japanese proposal,the ASEAN + 3 finance ministers' meeting in May2000 began a review of the economic circumstancesof the countries of the region. Also, in light ofthe importance of research cooperation to preparefor policy dialogue and discussion, the meetingalso agreed on the building of a network ofresearch and training institutes.
(c) The Japan-China- Koreaframework
Japan, China, and the Republic ofKorea have major roles to play in furtheringregional cooperation in the Asian region, and weconsider it necessary to promote policy dialogueactively by means of a Japan-China- Koreaframework.
The first Japan-China-Koreaseminar on international finance was held in theRepublic of Korea in August 1999. Representativesof research institutes in the three countries(Japan's Institute of Fiscal and Monetary policy,Korea's Institute for International EconomicPolicy, and China's Institute of WorldDevelopment) and the directors-general responsiblefor international finance agreed to holdtrilateral seminars at least once a year, so as toenable the three research institutes to exchangeviews on international financial cooperation; thesecond was held in Japan in February 2000. Policydialogue among the three nations should befurthered by making active use of opportunitiessuch as these.
(6) Building a financialcooperation network in the region
(a) Building networks formultilayered financial cooperation
Considering factors such as thegrowing interdependence in the Asian region andthe possibility of the contagion of currency andfinancial crises within the region, we believe itto be indispensable to have a regional financialarrangement to complement existing internationalfinancial cooperation mechanisms, including theIMF. Such a framework for regional cooperationbetween monetary authorities would also contributeto the stability of exchange rates within theAsian region. Many of the participants from Asiawho joined in this Subcouncil's discussionspointed out the necessity of a complementaryregional mechanism.
On the subject of currency andfinancial cooperation, at the ASEAN + 3 summitheld in Manila in November 1999 it was agreed toenhance policy dialogue and cooperation with aview to enhancing self-help and support mechanismsin East Asia.
There are already a number ofcooperative relationships between monetaryauthorities in the Asian region, for example swapagreements between Japan and the Republic ofKorea, and between Japan and Malaysia under theNew Miyazawa Initiative, dollar repurchaseagreement facilities between various Asiancountries, including Japan, and a swap arrangementwithin ASEAN.
In view of factors such as thediversity of Asian nations, in strengthening theframework for regional cooperation betweenmonetary authorities it would be both effectiveand realistic to build networks for multilayeredfinancial cooperation by expanding and combiningthe bilateral and multilateral cooperation.
(b) The Chiang Mai Initiative
At the ASEAN + 3 meeting offinance ministers held in Chiang Mai in May 2000,agreement was reached on the following matters,based on the agreements at the November summit.
| (i) | To use the ASEAN + 3 framework to facilitate the exchanges of consistent and timely data and information on capital flows. | |
(ii) | To expand the ASEAN Swap Arrangement and to build a network of bilateral swap and repurchase agreement facilities between ASEAN, China, Japan, and the Republic of Korea (the Chiang Mai Initiative). The countries concerned will henceforth examine how to implement these agreements. As regards the expansion of the ASEAN Swap Arrangement, operations will proceed within ASEAN. With respect to the building of a network of bilateral swap and repurchase agreements between ASEAN, China, Japan, and the Republic of Korea, negotiations on the bilateral arrangements will take place between the countries concerned, although it may facilitate those negotiations if the participating countries could first agree on standard agreements. Japan could contribute via swap and repurchase agreement facilities using yen and other foreign currencies held by the monetary authorities. The official reserves of the ASEAN + 3 countries total more than US$700 billion (at the end of 1999). In our view it would be highly meaningful for the stability of the region's currency and financial markets if the countries participating in this framework were to engage in closer monetary cooperation by using a portion of their official reserves. With regard to currency swaps using Asian currencies and repurchase agreements using Asian government bonds, if these are carried out in conjunction with steps such as the development of direct foreign exchange markets between Asian currencies and the building of settlement systems, they may have favorable consequences such as the expansion of transactions between Asian currencies. With regard to the relationship between this agreement and IMF assistance, since regional financial cooperation complements existing international financial cooperation mechanisms, including the IMF, it should be in conformity with IMF assistance. At the ASEAN + 3 meeting of finance ministers it was also agreed on the statement, "We requested the ASEAN Secretariat to lead and coordinate a study on other appropriate mechanisms that would enhance our ability to provide sufficient and timely financial support to ensure financial stability in the East Asian region." |
As became clear from the contagionof the currency crisis and the course of therecovery, the Asian economy is strengthening itseconomic and social unity through a process ofdeepening interdependence.
Japanese companies have played amajor role in this process of deepeninginterdependence. Japanese companies are buildingcross-border procurement, production, and salesnetworks within the Asian region, and the Japaneseeconomy is deeply integrated into the region.Deepening interdependence with the Asian economycould produce a variety of beneficial effects forJapanese society, affected as it is by the agingof its population and a falling birth rate.
Developments such as these revealthat Japan and Asian countries are forming veryclose economic and social relations. We believethat the New Miyazawa Initiative, which helpedAsian countries affected by the currency crisis toovercome economic difficulties, was based on thisfundamental understanding.
In the building of stable economicand financial systems that can support sustainableeconomic growth in Asia, the role Japan shouldplay is large.
(1) The stable growth of theJapanese economy, and the further opening of theJapanese market
The stable growth of the Japaneseeconomy is of very great importance to the economyof Asia, and Japan is exerting every effort inbringing about its own economic recovery. Asiancountries have particularly high hopes andexpectations with regard to the increase ofJapan's imports.
As was pointed out in the November1999 report of "Mission for Revitalization ofAsian Economy", the Japanese mission on Asianeconomic revival, it is essential for Japan toease or remove regulations in a variety ofspheres, such as people, goods, money, andinformation, and to transform itself into acountry more open to Asia and to the world as awhole. Unless Japan opens up, it will be unable tobuild true partnerships with Asian countries.
(2) The role of Japanesecompanies and financial institutions
(a) Direct investment by Japanesecompanies has played a major role in the processby which the industrial structure within Asia hasbeen upgraded in a chain-like sequence. Inaddition, by building procurement, production, andsales networks in the region, Japanese companieshave helped to nurture the development of localindustries. They have also contributed to therecovery of the Asian economy by such means assupporting local subsidiaries experiencing fundsshortages after the currency crisis by means ofloans and capital injections, including throughthe use of the Overseas Investment Credits fromJapan Bank for International Cooperation ("JBIC"),and by other measures such as shifting theirorientation from domestic demand to exports, andincreasing local procurement ratios.
Nevertheless, it was pointed outthat unlike European and U.S. companies, whichafter the currency crisis engaged actively indirect investment through mergers and acquisitionsof existing companies, Japanese companies did notengage in corporate mergers and acquisitions,owing in part to the economic sluggishness inJapan. In view, among other things, of the lack ofany basic change in the strength of thefundamentals of the Asian economy since thecurrency crisis, and of the fact that Asiancountries have been substantially easingregulations on inward direct investment, it ishighly hoped that Japanese companies will adopt along-term perspective, and step up progress inmaking technology transfers and buildingindustrial networks within Asia.
In order to expedite this kind ofdirect investment by Japanese companies, theJapanese government must make approaches with theaim of encouraging recipient countries to improvetheir investment environments, and make furtherprogress in such areas as the conclusion ofinvestment protection agreements.
(b) As part of their efforts todeal with their NPL problems and rehabilitatetheir management, Japanese financial institutionshave reviewed their overseas operations, haveclosed or reduced the size of overseas bases, andhave worked to recover overseas loans. This trendcan be seen in Asia, too. Although European andU.S financial institutions also took steps toreduce lending to Asia after the Asian currencycrisis, Japanese financial institutions differfrom European and U.S. financial institutions inthat the latter have recently been activelyacquiring financial institutions in countries suchas the Republic of Korea and Thailand. On theother hand, moves such as these are virtually notseen on the part of Japanese financialinstitutions, though leading financialinstitutions continue to regard the Asian regionas an important region in their overseasstrategies, and are doing all they can to retaintheir remaining bases. We expect Japanesefinancial institutions to complete the improvementof their financial condition as soon as possibleand, based on their respective medium to long-termstrategies, to contribute to the restoration andstrengthening of financial intermediationfunctions in Asia.
In addition, in order to enhancethe capabilities of financial institutions inAsian countries, human-resource development is anurgent issue to be addressed. It is hoped thatJapanese financial institutions will contribute tostrengthening the capabilities of those financialinstitutions by transferring their own know-how tothose countries through participation in technicalassistance programs and the interchange ofpersonnel at the private-sector level.
(3) Assistance for efforts madedomestically by Asian countries
| (a) | Institutional development and human-resource development are the keys for success of efforts being made domestically in Asian countries to reform their financial and corporate sectors and develop social safety nets. Accordingly, Japan should actively assist those countries in their efforts by providing technical assistance through the dispatch of experts in various fields, especially for the staff of financial authorities and other institutions, and also by providing assistance for human-resource development. | |
(b) | The development of SMEs and supporting industries is essential for the formation of an independent and self-reliant industrial base. Accordingly, we believe that support in such areas as the provision of technical assistance relating to spheres such as system design and know-how concerning lending to SMEs, and assistance for human-resource development, will continue to be necessary. | |
(c) | In Asian countries there is a particularly urgent need to educate and train science, engineering, and managerial personnel. Accordingly, we consider it important that Japan should share its educational resources with the rest of the Asian region by building a multilayered education network with universities and other educational institutions in the region. Among other things Japanese universities may try to enable lectures in science and engineering and management departments to be received in Asian countries, for example by using the Internet. | |
(d) | Since demand for economic and social infrastructure in Asian countries remains strong, and economic and social infrastructure is a prerequisite for establishing an independent and self-reliant industrial base, we consider that support to build the infrastructure in Asia by means of diverse financial assistance from JBIC will continue to be necessary. In doing so it will be necessary to take into consideration aspects such as the principle of complementarity in JBIC to private financial institutions; situation of the private-sector development of infrastructure; and the availability of funds in each country. | |
(e) | To date Japan has been helping to satisfy the urgent need for funds of Asian countries that succumbed to currency crises, but we believe that greater importance must be given to assistance for crisis prevention, including the building of stable economic and financial systems that can support sustainable economic growth. | |
(f) | It is necessary for Japan to enhance bilateral policy dialogue with Asian countries, and to build relationships with them that make it possible to engage in frank exchanges of opinion concerning economic policies necessary for crisis prevention. Particularly when building the network of bilateral swap and repurchase agreement facilities based on the Chiang Mai Initiative, policy dialogue with the countries concerned will be extremely important. We believe that for engaging in multilateral policy dialogue under the ASEAN + 3 framework, bilateral policy dialogue will be useful. |
(4) Assistance for globalefforts
| (a) | The role of technical and other assistance by the IMF, World Bank, and ADB will continue to be of very great importance to Asian countries in carrying out policy management in conformity with international standards and codes, and carrying out such steps as the reform of their financial and corporate sectors, the study on appropriate exchange rate regimes, the development of social safety nets, and the use of IT. Japan should continue to give active support to the activities of international financial institutions in these areas. | |
(b) | Japan is in a particularly good position to be well informed on Asian conditions. Therefore, Japan should act on the IMF, the World Bank and the ADB to make sure that Japan's views are fully reflected in the initiatives of these organizations. |
(5) Assistance for regionalefforts
| (a) | With regard to the strengthening of cooperation within the region through measures such as the promotion of trade and investment, the development of trade-financing systems, the development of regional bond markets, the promotion of policy dialogue, and the building of financial cooperation networks, Japan should actively put forward initiatives. It is also necessary for Japan to strengthen its technical and financial assistance for regional efforts of this kind. | |
(b) | Policy dialogue will be the most important key to fostering regional cooperation in Asia, and we believe that to promote that policy dialogue Japan should actively provide technical and financial assistance. We also believe that other steps can be taken to give additional impetus to that policy dialogue, including supporting the building of a network of research and training institutes in the region, and conducting joint research and seminars. | |
(c) | It is important to provide assistance for projects being undertaken as a result of regional cooperation by Asian countries, for example the development of the Greater Mekong Subregion. At the Japan-ASEAN summit that took place in February 2000, Japan made clear that it considered that the development of the Greater Mekong Subregion to be important as a project that, by fostering the harmonious development of ASEAN and the correction of economic disparities, would lead to the economic prosperity and political stability of the region as a whole. It is also necessary to increase assistance for South-South cooperation being implemented by relatively developed Asian countries. |
(6) Fostering theinternationalization of the yen
With regard to theinternationalization of the yen, in April 1999 areport by the Council on Foreign Exchange andOther Transactions pointed out that strengtheningthe role of the yen as an international currencywould be conducive to the stability of foreignexchange markets, particularly those in Asia, andin turn to the economic stability of Asiancountries.
Participants from Asia pointed outthat to increase the weighting of the yen incurrency-basket systems operated by Asiancountries: it is necessary to increase theconvenience of investing and raising funds in yen;the internationalization of the yen should befostered through regional cooperation; and it isnecessary to develop direct foreign exchangetransactions between the yen and Asian currencies.
Concrete measures to foster theinternationalization of the yen were announced atthe end of 1998 and subsequently implemented,including the start of a competitive price auctionof Financial Bills (FBs) and the tax reform. Incompliance with the wishes of Asian countries,further steps must be taken to expedite theinternationalization of the yen, includingfostering the improvement of Japanese financialand capital markets and the development ofsettlement systems.
As the upgrading of industrialstructures has spread in a chain-like sequenceamong Asian countries, multilayered close tradingand investment relationships have been created,and progress is being made with the building ofcross-border procurement, production, and salesnetworks by Asian companies. In consequence, Asianeconomies have reached an unprecedented state ofinterdependence. What is more it is projected thatEast Asia will continue to achieve high economicgrowth relative to other regions, and the degreeof dependence on intraregional trade will continueto increase.
The recent Asian currency andfinancial crisis has meant tremendous hardship formany people in Asia. However, the crisis made themsearch long and hard for solutions to overcomethis disaster and this present endeavor hasbrought real sense of solidarity to the people inAsia. The crisis has strengthened cooperationwithin the Asian region, and may provide anopportunity to build a more stable and prosperousAsia in the 21st century.
In Asia, relationships between"the center" and "theperiphery," and "great nations" and"peripheral nations," have existed sinceantiquity as fundamental models. However, the highgrowth and increasing regional interdependencethat has occurred over the past 30 years in Asiashow that Asia is entering a new era in which thecountries of the region are linked mutuallythrough networks, and the IT revolution isaccelerating this trend. In the 21st century it isincumbent upon us to build within Asia amultilayered regional cooperation network to adaptto this change.