Asian Monetary Integration: A Japanese Perspective

This paper discusses Japan’s strategy for Asian monetary integration. It argues that Japan
faces three major policy challenges when promoting intraregional exchange rate stability.
First, there must be some convergence of exchange rate regimes in East Asia, and the most
realistic option is for the region’s emerging economies to adopt similar managed floating
regimes—rather than a peg to an external currency. This requires major emerging
economies—particularly the People’s Republic of China (PRC)—to move to a more flexible
regime vis-à-vis the US dollar. Second, given the limited degree of the yen’s
internationalization and the lack of the renminbi’s (or the prospect of its rapid) full
convertibility, it is in the interest of East Asia to create a regional monetary anchor through a
combination of some form of national inflation targeting and a currency basket system.
Emerging economies in the region need to find a suitable currency basket for their exchange
rate target, such as a special drawing rights-plus (SDR+) currency basket—i.e., a basket of
the SDR and emerging East Asian currencies. Third, if the creation of a stable regional
monetary zone is desirable, the region must have a country or countries assuming a
leadership role in this endeavor. There is no question that Japan and the PRC are such
potential leaders, and the two countries need to collaborate closely with each other.
To assume a leadership role, together with the PRC, in creating a stable monetary zone in
Asia, Japan needs to make significant efforts at the national and regional levels and further
strengthen financial cooperation. Practical steps that Japan could take include (i) restoring
sustained economic growth through Abenomics; (ii) transforming Tokyo into a globally
competitive international financial center; (iii) further strengthening regional economic and
financial surveillance (Economic Review and Policy Dialogue and ASEAN+3 Macroeconomic
Research Office) and regional financial safety nets (Chiang Mai Initiative Multilateralization)
and creation of an Asian currency unit index; and (iv) launching serious policy discussions
focusing on exchange rate issues to achieve intraregional exchange rate stability.