4. Recommendations to Advanced Countriesand Creditors
The advanced industrialized countries haveresponded to the currency crises in the emerging market economiesof Mexico and Asia with sharp interest. The United States playedan important role in the Mexican crisis, while Japan played asimilar role in the Thai crisis in providing support for the IMF'sfinancial support program. This type of bilateral assistance providedby the advanced economies can be viewed as assistance extendedto a form of public-good for the purpose of stabilizing the regionaleconomy and its financial systems.
(1) Bilateral Assistance
Support must be provided by the advancedindustrialized countries in the form of bilateral assistance andadvice to complement the IMF's financial support programs. Advancedcountries in possession of extensive information and with closeeconomic ties with the affected countries must take a particularlyactive part in these bilateral efforts. In addressing such issuesas the reform of the financial sector, infrastructure development,the modernization of corporate management and the review of variouspertinent systems and institutions, both government and private-sectorassistance programs should actively provide technical assistanceand human resources development assistance.
(2) Disclosure of Information of InstitutionalInvestors
Regarding the short-term capital movement,capital importing countries must develop a supervisory and regulatoryframework to ensure the soundness of domestic financial institutions.On the part of capital exporting advanced countries, considerationshould be given to disclosure of cross-border activities by institutionalinvestors (banks, securities companies, insurance companies, mutualfunds, etc.) and hedge funds. A minor portfolio shift by a majorfund can leave a very serious mark on the foreign exchange, capital,and financial markets of a country with a relatively small economicscale. In view of this fact, international consideration shouldbe given to the establishment of surveillance systems to preventmarket manipulation and to avert the exercise of undue influence.
(3) Risk Awareness and Risk Managementby Institutional Investors
Major creditors, particularly institutionalinvestors, were fully aware of the fact that information disclosurein host countries was inadequate and that financial supervisorysystems were generally lax. It can be safely assumed that investmentdecisions were fully discounted for these risk factors. In otherwords, the high interest rates charged to capital-importing countrieswere only partially a reflection of the attractive investmentopportunities available there. In fact, the high rates containeda substantial risk premium to offset the high credit risks andforeign exchange risks associated with lending to these countries.These observations bring into question the risk management stanceof major creditors and their ultimate responsibilities.
5. Recommendations to Japan
Japan maintains close political and economicties with the Asian region. By the same token, Japan accountsfor an important portion of the international trade conductedby the countries of the region. Japan has a vital interest inthe stability of the region and its sound economic development.In view of the experiences of the Asian currency crises, it ishoped that Japan will perform the various functions noted below.Given the position that regional cooperation conforms to the nationalinterests of both the giving and the receiving countries, it isvery important for Japan to be prepared to take the initiativein implementing effective solutions.
(1) Steady Expansion of the JapaneseEconomy and the Stabilization of Its Financial System
[1] Renewed Efforts toward Economic Recovery
The growing share of intra-regional trade and investment in theeconomic activities of the Asian region implies that the steadyexpansion of the Japanese economy and the correction of excessivedepreciation of the yen is of vital importance to the countriesof this region. However, Japan has not been able to recover fullyfrom the effects of the collapse of the "bubble economy."The failure of a string of major financial institutions during1997 has as its background the serious build-up of bad debts followingthe bursting of the speculative bubble. These development haveled to a deterioration in consumer confidence and corporate sentimentwhich in turn have affected the performance of the real economy.As such, the Japanese economy finds itself in an extremely difficultpredicament today. Needless to say, the Asian countries are hopingthat a Japanese recovery will boost Japanese imports from theregion. Against this background, it is of critical importancethat maximum efforts be made to re-start the Japanese economyas soon as possible and to lead it toward a robust recovery.
[2] Stabilizing the Financial System
Securing domestic and international confidence in the stabilityof the Japanese financial system will have a highly favorableinfluence on the financial markets of the Asian region. Concerningthis point, the two laws for financial stabilization approvedin February 1998 are now being implemented to stabilize the Japanesefinancial system. Continued efforts need to be taken to assurethe successful stabilization of the financial system.
[3] Japan's Big Bang
Japan finds itself in the midst of a universal trend toward capitalliberalization and globalization of the financial and capitalmarkets. Given this fact, it is essential that fundamental structuralreforms be made in the entire financial system with a view tosatisfying the requirements of market participants. Specifically,it is necessary to realize the following objectives in order tobuild a truly excellent financial system: higher-yield managementof personal financial assets, providing attractive services throughvigorous intermediating activities, providing ready capital flowsto promising growth-industries of the future, and creating a frameworkfor transactions in which users feel secure. The financial systemreform program currently being implemented (the Japanese "BigBang") must be pushed forward with full commitment. Someaspects of the ongoing reform require legislative revisions. Tothis end, Financial System Reform Bills are currently being consideredin the Diet. Early enactment of these bills and continued progresstoward reform are hoped for as Japan advances toward creatinga financial system which can serve as the foundation of a vigorousnational economy in the 21st century.
[4] Contributing to the Recovery of the AsianEconomy
In combination with the continued promotion of market liberalization,the broad range of economic and financial measures currently beingpursued by Japan can make a real contribution to the recoveryof the Asian economy.
(2) Contributing to Internationaland Regional Assistance
[1] Acting on IFIs
Monitoring and surveillance of the financial markets and macroeconomicconditions in Asia will be of increasing importance in the future.Japan is in a particularly good position to be well informed onAsian conditions. Therefore, Japan should act on the IMF, theWorld Bank and the ADB to make sure that Japan'sviews are fully reflected in the initiatives of these organizations.Specifically, Japan should have larger input in ongoing surveillanceactivities of the IMF, the World Bank and the ADB and in financialsupport programs in times of crises.
[2] Participating in Regional Surveillance
Japan has made many important contributions to regional initiativesmounted during the Asian currency crises(see Appendix 20). Theseinclude the Tokyo meeting of the countries assisting Thailandand the Manila Framework. Japan also provided the largest bilateralassistance to the IMF's financial support packages for Thailand,Indonesia, and South Korea. Japan is also the only country whichis a participant in all of the following principal forums: IMF,World Bank, ADB, G-7, APEC, ASEM, and the Manila Framework. Assuch, it is hoped that Japan will play an even more active rolein the future.
Specific actions which Japan should takeinclude the following: active promotion of efforts to strengthenthe regional surveillance functions of the Manila Framework, andactive support of the Tokyo offices of the IMF, World Bank, theADB and the ADB Institute.
[3] Bilateral Assistance
Japanese assistance in the form of yen loans, Export-Import Bank'sLoans and contributions to the World Bank and the ADB throughthe Japan Special Fund will continue to be of vital importance.
A. Yen Loans
In times of economic crises, it is important to provide activelyYen Loan Assistance in a responsive manner to meet the needs ofa recipient country, including flexible operations in terms ofthe amount and timing of commitment, when deemed necessary. Toensure this flexibility, institutional frameworks, such as a setof policies for emergency situations, need to be established.
Regarding types of loans, more commitment should be directed tonon-project-type loans, such as sector program loans to supportstructural adjustment and to Two-Step Loans to support small andmedium-sized enterprises and small farmers, by lowering a proportionof project-type loan commitments. Also, in project-type loan operations,priority should be given to supporting smooth implementation ofthe on-going projects financed by yen loans rather than to makingcommitments to new projects. The wider use of local currency costfinancing for the on-going projects should be considered to thisend.
B. Export-Import Bank's Loans, etc.
The economic turmoil in Asia has undermined the proper functioningof trade finance in the region. Hence, it would be beneficialto undertake the following forms of assistance as needed, appropriatelyutilizing the funds of the Fiscal Investment and Loans Programof the Japanese Government: Financial support using the Export-ImportBank's Two-Step Loans and Trade Insurance schemes; assistancedirected to promoting the overseas investment activities of Japanesesubsidiaries and affiliates in Asia (using the Export-Import Bank'sOverseas Investment Loans); and assistance directed to Japanesecompanies whose import schedules have been hampered by the creditcrunch (using the Export-Import Bank's Import Loans). Furthermore,thought should be given to a system enabling the Export-ImportBank to guarantee the bonds issued by the governments of Asiancountries.
C. Japan Special Fund for the World Bankand the ADB
Japan should use the facilities of the Japan Special Fund forthe World Bank and the ADB to support the structural reform effortsof developing countries by expanding and strengthening its technicalassistance programs to these countries. Japan should endeavorto identify more clearly its priorities and initiatives. For thispurpose, Japan should present various MDBs with a list of priorityconcerns and focus its assistance on these fields. In order topromote stable flows of private capital to developing countries,Japan should make a greater effort to identify and locate syndicatedfinancing projects in which it can readily participate.
[4] Continued Importance of TA Assistance(Including Private Level Assistance)
A. Preparing a List of Qualified Persons
It is hoped that Japan will develop systems whereby it can moreactively contribute to personnel needs. It can be achieved by,for example, establishing a stand-by list for quickly recruitingqualified financial experts with sufficient experience.
B. Assistance Using the Japan Special Fundfor the World Bank and the ADB
The Japan Special Fund for the World Bank and the ADB should bemore actively utilized in supporting research and human resourcesdevelopment programs. Specifically, greater support should begiven to the activities of the World Bank's Economic DevelopmentInstitute and the ADB Institute.
C. Policy Dialog with the Asian Countries
It is highly beneficial to extend and upgrade Japan's policy dialogwith the Asian countries on such issues as structural and macroeconomicpolicies.
(3) Improving the Environment forthe More Extensive Use of the Yen
[1] Improving the Infrastructure of the TokyoMarkets
One of the factors contributing to the Asian currency crises canbe described as the region's "overdependence on the dollar."In view of this realization, some Asian countries are now tryingto distance themselves from the dollar peg. Similarly, there isa growing interest in expanding the volume of yen-denominatedtransactions. A more desirable foreign exchange regime in Asiaafter the current crises are over would require larger role ofthe yen. To promote the more extensive use of the yen, steps mustbe taken to facilitate the management of yen assets by domesticand international investors with a highly diverse range of investmentneeds. Efforts must be made to develop a sound infrastructurein the Tokyo markets through measures including promoting thesteady improvement of secondary markets and examining the taxsystem. As mentioned above, the Japanese Big Bang is aimed atcreating a truly excellent financial system in terms of both fundmanagement and fund raising. It is again hoped that the Big Bangreforms will be steadily implemented because these reforms willplay an important role in preparing the environment for the moreextensive use of the yen.
[2] Implementing the Revised Foreign ExchangeLaw
The revised Foreign Exchange Law came into effect on April 1,1998 as the forerunner of the structural reform of the Japanesefinancial market. The revised law provides for the fundamentalliberalization of all cross-border capital transactions. For instance,opening an account with overseas banks, the issuance of Euro-yenbonds and other transactions were previously subject to priorapplication procedures, whereas, under the revised law, such activitiescan be freely undertaken. These liberalization measures will expandthe scope of business opportunities open to both domestic andinternational investors and will lead to more favorable managementand raising of funds. The revision of the Foreign Exchange Lawwill promote a smoother flows of domestic and international capitaland will vitalize Japanese financial and capital markets, therebylending new energy to the Japanese economy.