(Page 9 of 29) - Japan's Regional Turn to Stabilize the Yen authored by Grimes, William.

The development of local-currency bond markets is also a potential moneymaker
for financial institutions operating in the region. There are two main East Asian
bond market initiatives. The first is ASEAN+3’s Asian Bond Market Initiative
(ABMI), which seeks to address both infrastructural and liquidity deficiencies in
regional bond markets (with an emphasis on the former). It operates on a purely
self-paced basis, with a soft form of surveillance known as “self-assessment.”
Meanwhile, the Asian Bond Fund initiative of the Executive Meeting of East
Asia-Pacific Central Banks (EMEAP)

seeks to improve bond market liquidity by

providing a vehicle for investing in local-currency government bonds. It is not
clear that these initiatives hold much promise in terms of advancing their stated
agenda, but there probably is some profit to be made for private sector actors.

3. Regional surveillance is very limited, and is essentially organized around the CMI

and ABMI processes. Neither has an enforcement mechanism. Although
surveillance itself may be rudimentary, considerable advances have been made in
terms of communication among central bank and finance ministry personnel – a
significant step, given the almost complete lack of communication at the time of
the Asian Financial Crisis.

4. The final element of financial regionalism, which is still only at a conceptual

stage, is currency cooperation. Japanese policy makers especially have argued for
much greater linkage among regional currencies, as seen in the
internationalization of the yen push of the late 1990s and early 21

century.

While that specific initiative has been dropped, many of its elements remain in
discussions of how to go about reducing regional currency volatility. The main
suggestions being put forward are based on either the development of a regional
currency basket or on currency management around an Asian Currency Unit.

Both would reduce the volatility of Japan’s nominal effective exchange rate.

Evaluating Hypotheses

While I deal with the content and implications of financial regionalism at length

elsewhere,

the reasons why Japan is making this regional turn in finance are still in

question. This section elaborates the three alternative explanations noted above, which I

and investing long in local-currency projects. It is argued that these mismatches made it
impossible for them to service their debts once their currencies began to fall, creating a
vicious downward spiral. Ito and Park 2004.

The members are ASEAN-5 plus Australia, China, Hong Kong, Japan, South Korea,

and New Zealand.

Kawai 2005. The ADB announced its intention to create an ACU in early 2006, but it

still has not done so, apparently for political reasons. The Japanese Ministry of
Economy, Trade, and Industry already has a similar regional index called the Asian
Monetary Unit, which can be found on its webpage, but it has not gained much if any
attention outside of a small group of academic economists in Japan.

Grimes 2006a, b, and c.

Grimes, Regional Turn - 9