Tuesday, November 16, 2004

Towards a Yen Euro zone in Asia?

Bank of Japan Governor Toshihiko Fukui said it would
have a stablizing effect on the global financial system
if a clear rival to the US dollar as a key global
currency were to emerge

Speaking at a symposium in Tokyo on the theme "The Euro:
Five Years On -- Implication for Asia", the Japan
central bank chief cited data showing the common
currency of the 12-nation European currency bloc is
emerging as a serious rival to the dollar as a key
currency for conducting global trade and investment

"In the past five years (since its launch in 1999), the
importance of the euro has increased considerably,"
Fukui told the seminar, which featured such other
speakers as European Central Bank vice-president Lucas
Papademos, and Toyoo Gyohten, the highly respected
former Japanese vice-minister for international affairs.
Fukui said more than 50 countries link their currencies
to the euro, while the proportion of foreign exchange
reserves held in euros has risen to 20 pct, and nearly a
third of the cross-border-issued bonds are now
denominated in euros. Fukui seemed to welcome the
growing prominence of the euro by referring to the
dangers associated with allowing any single currency to
dominate global commerce

"In such a situation, the economy of the key currency is
easily tempted to focus its economic policy on domestic
considerations," an apparent thinly veiled rebuke to the
economic policies followed by the US adminstration of
President George W Bush

"In today's globalized economy, this could lead to
undesirable ripple effects on the rest of the world,
through the fluctuations of the external value of the
key currency." Fukui said if there were two competing
key global currencies, "competition between them could
lead to more attention to the external value of key
currencies. This could have a positive effect on the
stability of the global financial system." The BoJ chief
briefly indicated that the Japanese yen also had a role
to play in that regard

"I believe that the yen can and should play a larger
role in the global market," Fukui said, citing trends
which could make that a certainty

"Considering the deepening economic relations between
Japan and the rest of Asia, Asia should benefit if the
use of the yen could be facilitated," Fukui told his
high-powered audience

In 2003, nearly half of Japan's foreign trade was with
Asia, up a third over the past decade

Fukui said the yen could play a larger role in both fund
management and fund-raising, especially in light of
Asia's strong demand for capital and Japan's vast pool
of savings

But the Japanese central bank chief dismissed the notion
that an Asian equivalent to the euro -- an Asian common
currency -- would emerge within the lifetime of any of
his grey-haired listeners

"Could we see a common currency area in Asia? For the
near future, you would agree that this is quite
unlikely," Fukui said

He subsequently indicated it could be 50 years before
Asia has a common currency -- the time it took a handful
of Europe's nations to embrace the concept

Great changes would need to occur, such as the
development of vibrant regional financial markets, made
possible by liberalized cross-border capital flows

Fukui said there is encouraging evidence that that is
already happening, beyond merely the tremendous increase
in inter-Asian trade

He cited in particular the example of the Asian Bond
Fund II project, promoted by the 11 central banks of the
EMEAP economies. EMEAP stands for the Executives'
Meeting of East Asia-Pacific Central Banks, an
organization founded in 1991 by the central banks of
Australia, China, Hong Kong, Indonesia, Japan, Korea,
Malaysia, New Zealand, the Philippines, Singapore and

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