| Annex 1 |
1.Sub-Study-group for Trade and Capital Transactions
(1) Outline ofMeetings
Business experts ontrade and capital transactions (trading companies,financial institutions, etc.) reported the currentstatus of their yen-denominated transactions, andpossibilities for expanding yen-denominatedtransactions were examined. (7 meetings convened)
(2) Major Findings from Research and Investigation
The use of the yenis not increasing in both trade and capitaltransactions. However, new opportunities forexpanding the use of the yen are emerging in viewof the shift of Asian countries to floatingexchange-rate regimes, and the trend amongJapanese firms to pay greater attention to profitand risk levels. In this context, tradingcompanies, manufacturers and others indicated thatthey would be pursuing strategies for increasingthe use of the yen, particularly in theirtransactions with Asia. Together with a greatereconomic and financial stability in Japan and theimproved convenience of the yen, such corporateefforts will contribute to the promotion of theinternationalization of the yen in the Asianregion. At the same time, continued efforts by thegovernment and the private sector will proveindispensable in the realization of furtherimprovements in the general environment of Japan'sfinancial and capital markets.
2. Sub-Study-group forResearch on Currency System
(1) Outline ofMeetings
Theoretical andempirical analysis was conducted concerningdesirable foreign-exchange regimes for Asia, witha focus on the currency basket system. (5 meetingsconvened)
(2) Major Findings from Research and Investigation
Theoretical modelswere constructed to examine currency-basketsystems, dollar-peg systems, and floating exchangerate systems. Macroeconomic data from Thailand wasused for empirical analysis. The theoretical andempirical analyses both pointed to the followingprincipal conclusion. Although the most desirableforeign exchange regime varies depending on thespecific policy objectives adopted by nationalauthorities, in most instances a currency-basketsystem was the most desirable (minimizing the lossvalue in the policy-objective function of theauthorities).
The optimalweighing of a currency basket also variesdepending on the policy objectives of theauthorities (foreign exchange stability, domesticeconomic stability, current account stability,etc.). Although trade-weighed currency basketsyield the optimal results under certainassumptions, in most cases due attention must bepaid to other factors affecting the goods andcapital markets, such as interest rates andforeign exchange risks.
Other theoreticalmodels indicated that increasing the weight of theyen in a currency basket would contribute tostabilizing the trade balance. In addition, it wasshown that such a currency basket would act toameliorate sudden capital inflows. On the otherhand, it was noted that a country introducing sucha currency-basket system could experience problemsof failed policy coordination with other countrieshaving similar trade structures.
3. Working Party (WP) forResearch on Settlement Systems
(1) Outline ofMeetings
Current systems ofsecurities settlement in Europe, the United Statesand Asia were reported. Discussions were heldmainly focusing on pertinent issues in preparationfor research trips. (3 meetings convened)
(2) Major Findings from Research and Investigation
Advanced countriesin Europe and the U.S. are pursuing variousinitiatives for the improvement of theirsecurities settlement and systems in accordancewith the G30/ISSA recommendations. In particular,Europe is actively involved in integration of andcooperation among Central Securities Depositories(CSDs). Progress is also being made in theimprovement of Asia's bond markets and securitiessettlement systems.
Japan's securitiessettlement system contains various inefficienciesdue to the existence of separate settlementorganizations for different types of securitieswhich operate under different rules andprocedures. This necessitates the following linesof action: i) review of the legal framework inbasic private law; ii) revision of the legalframework on securities collateralization; iii)review of the rules under international privatelaw. In addition, it is also important to preparea legal framework to facilitate cooperation withthe securities settlement systems of the Asiancountries.
With regard toreview the framework of basic private lawframework, the private-law attributes of theaccrual, transfer and expiration of the rights instocks, bonds and other securities should bere-examined. It is desirable to establish a legalstructure covering situation in which no physicalcertificate exists.
Japan should play aleading role by significantly improving its ownsecurities settlement system by resolving theseissues, and by actively supporting and cooperatingin the development of efficient securitiessettlement systems in the Asia region. Therealization of effective cooperation andpartnership with the securities settlement systemsin Asia will contribute to offering of aninstitutional infrastructure which is expected topromote the internationalization of yen.
| Annex 2 |
Emergence of theDeutsche Mark as a Foreign-Exchange IntermediatingCurrency
Secretariat'ssummarization based on the presentation byProfessor Soko Tanaka of Tohoku University to theGroup's 3rd meeting (held on January 26, 2000).
(1) The Deutschemark emerged as Europe's foreign-exchangeintermediating currency between 1989 and 1992,with 1990 standing as a critical watershed point.
Note: Aforeign-exchange intermediating currency is acurrency used in interbank transactions betweentwo currencies for which no direct exchangeexists.
(2) In selecting a foreign-exchange intermediatingcurrency, foreign exchange dealers and broker willopt for a currency with low transaction costs.Foreign exchange transaction costs are generallydetermined in inverse proportion to transactionvolume, and in proportion to foreign exchangerisks. As such, the emergence of the Deutsche markas a foreign-exchange intermediating currency canbe explained by the following two factors: i)increasing depth of mark-denominated transactionsin the customer-based foreign exchange markets(transaction volume factor); ii) greaterforeign-exchange market stability under the EMS(foreign exchange stabilization factor).
(3) Progress in EC market integration during thesecond half of the 1980s resulted in an increasein EC intra-regional trade. However, the ratio ofmark-denominated intra-regional trade did not risesignificantly. In view of this fact, it would bedifficult to attribute the increase in the realdemand for marks which supported its emergence asa foreign-exchange intermediating currency insecond half of the 1980s to trade in goods.
(4) Beginning in the second half of the 1980s,Germany embarked on a full-fledged program offinancial liberalization for the purpose of"boosting the international attractiveness ofthe mark." Particular attention was paid tocapital market liberalization measures whichincluded the following. In 1984, the 25%withholding tax on interest accruing tonon-resident bondholders was abolished. In May1985, German subsidiaries of foreign banks andsecurities companies were permitted to act as leadmanagers in mark-denominated foreign bond issues,and the prior approval requirement for the volumeof such issues was abolished. These measuresactivated mark-denominated fund procurement andmanagement by non-residents within the EC throughthe stepped-up issuance of mark-denominatedforeign bonds. At the same time, a sharp rise wasseen in transactions of domestic Germanfixed-income bonds (primarily government bonds) bynon-residents. These developments conspicuouslyincreased the volume of foreign-exchangetransactions between the Deutsche mark and thecurrencies of the EMS member countries, and addedto the depth of mark-denominated transactions inthe second half of the 1980s.
Other EC countriessimilarly liberalized capital transactions andeliminated foreign-exchange controls andregulations. In light of this development, thehigher level of stability under the EMS encouragedinstitutional investors to pursue strategies ofintra-regionally diversified investments.Consequently, a concentration in Deutsche marks asthe currency of investment did not necessarilyoccur within Europe. However, there was a tendencyto use the mark when hedging the foreign exchangerisks generated by these diversified investments.This preference was based on the fact that theDeutsche mark enjoyed the highest level offoreign-exchange stability in relation to the EMScurrencies. As a result, even when the involvementof the Deutsche mark the intra-regionallydiversified investments of institutional investorswas very small, such investments gave rise toseveral times larger volumes of Deutsche markforeign exchange transactions.
(5) The use of the Deutsche mark as anintervention currency added to the depth ofmark-denominated transactions. The choice of themark as an intervention currency within thefluctuation band of the EMS can be attributed inpart to the basic characteristic of the EMS whichfeatured floating rates externally and fixed ratesinternally. For instance, assume a situation inwhich the dollar was depreciating against the EMS,while the mark stood as the strongest EMScurrency. If EMS countries whose currencies aresagging were to sell dollars and buy their owncurrencies to maintain the value of theircurrencies, this would encourage furtherdepreciation of the dollar and run the risk ofgenerating speculative selling of the dollar. Toavoid this situation, the EMS countries would optto sell marks to intervene in their foreignexchange markets. The use of EMS currencies(almost exclusively Deutsche marks) in intra-bandintervention began to outdistance the use of thedollar beginning in 1986. This coincides with theperiod of long-term sharp depreciation of thedollar against the EMS currencies.
(6) After 1983, the EMS countries adopted theeconomic performance of West Germany, which hadachieved stable prices, as a benchmark in policymanagement. This encouraged the emergence of themark as the key currency in the EMS. Followingthis development, the EMS member countries beganto resort to intervention in the mark exchangemarket to manage their parities against theirother nine EMS counterparties. On its part, theBundesbank intervened in the dollar market tomanage the dollar-mark exchange rate. With theother monetary authorities using the mark forintra-band intervention to maintain their currencylevels within the EMS, a division ofresponsibilities was established (Deutsche mark asintervention currency).
Consequently, themark-content of the foreign exchange reserves heldby central banks in Europe increased. By the endof the 1980s, the central banks of the EMS membercountries held nearly 50% of their foreignreserves in EMS currencies, of which the markaccounted for a very large portion (Deutsche markas reserve currency).
(7) The above developments gave further depth toDeutsche mark transactions, while also creatingconditions which promoted the use of the mark asan intermediating currency in the region. Afterthe second half of the 1980s, the exchange ratesbetween the mark and the other European currencieswere stabilized under the EMS regime, reducingtransaction costs between the mark and otherEuropean currencies. Consequently, it becamecheaper to use the mark as an intermediatingcurrency than the dollar.
(8) In addition to relatively smaller scale of theGerman economy and its financial and foreignexchange markets than that of the United States,various regulatory obstacles remained in place atthat time. Taking these factors intoconsideration, it can be said that the choice ofthe mark as an intermediating currency was not theresult of German strength alone. Rather, thischoice can be traced to such developments as ECintegration and harmonization among EMS membercountries.
For instance, inApril 1992, daily average volume of Deutsche marktransactions on the London markets amounted to theequivalent of $124.2 billion. This was far largerthan the $47.1 billion traded on the Germanexchanges, indicating that London was covering forthe German weakness in foreign exchange trading.Furthermore, the development of the euro-markmarket facilitated the procurement and managementof mark funds and played an important role inestablishing the mark as a foreign-exchangeintermediating currency.
(9) In view of the above points, the followingconclusion can be reached concerning the factorscontributing to the emergence of the Deutsche markas an intermediating currency. Positive roles wereplayed by the increased depth of Deutsche marktransactions resulting from the growth in capitaltransactions and the use of the mark as anintervention currency. However, greater importancecan be assigned to the emergence of the mark asthe key currency in the EMS which provided thefoundation for the above developments, and thestabilization of exchange rates between the markand other EMS currencies.