Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect

Asia-Pacific Review ISSN: 1343-9006 (Print) 1469-2937 (Online) Journal homepage: https://www.tandfonline.com/loi/capr20 Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect Satoshi Shimizutani To cite this article: Satoshi Shimizutani (2009) Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect, Asia-Pacific Review, 16:2, 26-41, DOI: 10.1080/13439000903381360 To link to this article: https://doi.org/10.1080/13439000903381360 Published online: 26 Nov 2009. Submit your article to this journal Article views: 1197 Citing articles: 4 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalinformation?journalcode=capr20

Asia-Pacific Review, Vol. 16, No. 2, 2009 Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect SATOSHI SHIMIZUTANI This article proposes an open and multi-tiered economic and financial system with introduction of an Asian common currency as a form for the Post Bretton-Woods arrangement. After reviewing the role of the incumbent international economic system, the reasons that an Asian common currency could contribute to consolidate the new international system is discussed bearing in mind the new environment of the relative decline of economic power of the United States and relative rise of economic power of China. Then a roadmap for the introduction of an Asian common currency is provided and how to proceed steadily on the long road towards the introduction of the new currency is argued. In particular, it is emphasized, as the world looks for a new direction, that strong political collaboration in the region is required precisely now with a view to making this a reality. Introduction This article proposes the form that the Post Bretton-Woods economic and financial arrangement should take, why an Asian common currency could contribute to consolidate the new international system, and how to proceed steadily on the long road towards the introduction of the new currency. The idea of an Asian common currency is obviously not first proposed this article. There has been a large volume of debate on the idea. In particular, most debate was concentrated in the period immediately before and after the millennium, and was largely motivated by two epoch-making events in the late 1990s. One was the Asian financial crisis which occurred in 1997 that had a detrimental effect on the economy of multiple Asian countries. Until ISSN 1343-9006 print; 1469-2937 online/09/020026 16 Routledge Publishing, Taylor and Francis,http//www.informaworld.com/. 26 # Institute for International Policy Studies,http://www.iips.org/. DOI: 10.1080/13439000903381360

Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect then, these countries had enjoyed unprecedented high growth which was dubbed the Asian miracle. After the onset of the financial crisis, there were expectations that a common currency would be useful for coping with speculative attacks on small-sized currencies and prevent a recurrence of the currency crisis. Establishment of a common currency, together with a proposal for an Asian version of the International Monetary Fund (IMF) (which would be called the AMF ), was expected to strengthen regional cooperation and financial support for troubled economies in the region. Strong economic integration and mutual interdependence through trade and foreign direct investment in the Asian region provided rationale for arguments on an Asian common currency since the region was vulnerable to exchange rate risk using the US dollar as international settlement. The other impetus for an Asian common currency was the introduction of European common currency (euro) in 1999. In Europe, the odyssey lasted a half century beginning with the initial international integration of goods through the European Coal and Steel Community in the 1950s, followed by more fluid movement of people and services. In 1979, European countries began to switch to a cooperative float system designed to stabilize the value against the dollar of the European Currency Unit (ECU) that were part of the European Monetary System (EMS). A further twenty years later in 1999, the euro was finally introduced. The success of the euro stimulated debate on the realization of a common currency corresponding to the euro in Asian countries which had stronger economic intra-regional ties. In retrospect, the arguments of an Asian common currency around 2000 were too early in terms of the international environment. Indeed, most discussions on introduction of a common currency or establishment of an Asian Currency Unit (ACU) died out around 2005. However, now is the time to revive the idea of Asian common currency since two essential factors have changed during the decade enabling us to set up conditions to move the argument forward. These factors are the relative decline of economic power of the United States and relative rise of economic power of China. Drastic change was directly revealed in the global financial crisis, which is widely perceived to have caused a full-scale once-in-a-century depression. The negative effect has spread from the chaos in the US financial market, which had been spawned by the sub-prime loan problem, to real sectors including key manufacturing industries. As a consequence of rapid globalization, the current crisis has spread like wildfire throughout the world and extended to the nations of Asia. Excessive leverage which is brought about by means of new financial technology and financial products has not been confined to the banking sector, and through securitization has resulted in adverse consequences ASIA-PACIFIC REVIEW V VOLUME 16, NUMBER 2 27

Satoshi Shimizutani for all markets. As a result, the current financial crisis has entailed astronomical losses on a hitherto unseen scale. According to the Global Financial Stability Report issued by the IMF in April 2009, the current losses in the financial sector in the US, Europe, and Japan reached four trillion dollars, which is five times the amount of losses of the Japanese banking sector in the 1990s. However, an on-going vicious cycle between economic deterioration and accumulated non-performing assets could result in total losses that amount to an even more staggering level. At the same time, the current crisis is qualitatively different in nature from previous economic crises in that it harbors the potential to bring about historical reform to the shape of the global economic and financial system. One factor is relative decline of the US economy, the epicenter of the crisis. Despite large scale bailout policies, the US economy has still seriously suffered from depression caused by huge losses from the crisis. In contrast, China has been enjoying high growth, while somewhat slowed in the crisis, and the economy hit bottom earliest among large countries. Moreover, China s GDP will soon exceed Japan s and China will be the second largest economy in the world with the largest population. Now, China holds a central position of trade and foreign direct investment not only in the Asian region but also worldwide. Put differently, the balance of economic power in the world is now changing, and we are facing an epoch-making period in world economy history. The historical changes in the international environment stimulate thought about the future of the international economic and financial system. The essence of the current financial crisis lies in market failure, which was largely caused by the malfunctioning of markets, which is evident in the lag in provision of monitoring systems, transaction rules, and information disclosure. As financial technology grew highly sophisticated through securitization (for example, of housing loans), those failures have opened a large gap between financial and real economies and finally plunged the economy into chaos. Now the issue is who pays the costs to maintain the working of global markets. This article proposes an open and multi-tiered economic and financial system with introduction of an Asian common currency. New international economic and financial systems will not be built overnight and we need to expand our scope to long-term, global and historical perspectives. The US dollar will hold the status of the key currency and is vital to the stable development of the global economy. Thus the creation of a third economic pole in Asia would not be a substitute for the current key-currency system, but would rather serve to complement it in conjunction with the euro. It is precisely now, as the world looks for a new direction, that strong political collaboration is required within the region with a view to making this a reality. 28 ASIA-PACIFIC REVIEW V NOVEMBER 2009

Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect Designing an international economic and financial system The Bretton-Woods system: advantages and disadvantages When envisaging a future international economic and financial system, it is important to explore the nature of the Bretton-Woods system and to draw lessons from its advantages and disadvantages. The Bretton-Woods system is the postwar global economic framework which was formed and supported mainly under the leadership of the US. Strictly speaking, the Bretton-Woods system refers to the IMF and World Bank system that involved a fixed exchange rate system between 1944 and 1971. Broadly speaking, the system also includes the current one which is descended from it. This arrangement was motivated by serious lessons from a series of protectionist international trade and financial transactions which provoked conflicting interests among nations and consequently led to war. Up until 1971, the dollar served as the anchor for every other nation s currency ( dollar peg ) as the sole key currency linked to the value of gold. However, with the series of economic policies called the Nixon Shock of 1971, gold conversion was abandoned and the international currency system switched from a fixed exchange rate system to a floating exchange rate system. The Bretton-Woods system made several significant contributions to the postwar global economy. First, high and sustainable economic development was achieved in Japan and Europe under the solid international economic and financial system which was sustained by the mighty US military capacity and political influence. Second, together with the IMF responsible for currency stabilization, the World Bank, the other pillar of the Bretton-Woods system, played a major role in spreading the market economy system globally, contributed to making economies more efficient, and stimulated economic growth in developing countries. In addition to the IMF and the World Bank, under GATT free trade was promoted, and the trade benefits have been the driving force for remarkable postwar economic growth. On the flipside of the coin, the Bretton-Woods system had some drawbacks. First, the discipline necessary for the stabilization of the external value of the currencies broke down for the dollar. Once the dollar was generally accepted as the means of international transaction settlement, currency competition died out as economies of scale came into effect through network externalities and the dollar has enjoyed a monopoly as the international currency. As a result, the world was occasionally at the mercy of the domestic problems and policies of the US. Second, despite the fact that each country s international transactions were carried out exclusively in dollars, the US has not been completely supportive of liquidity supply to countries in trouble and the IMF does not have sufficient capacity to fulfill this function. Third, we have observed expanding economic ASIA-PACIFIC REVIEW V VOLUME 16, NUMBER 2 29

Satoshi Shimizutani disparities in the world. Many countries which imported the market economy were left out in terms of economic development. Market economies come in a number of different forms, depending on regional and historical factors but what was spread to the world was the uniform US style market economy that ignored regional characteristics; this sometimes invited a backlash from developing nations and greater economic confusion. In this regard, the penetration of US style market economics is clearly evident in the current crisis, which has plunged the global economy into chaos. Reconstruction of the global economy and financial system The current financial crisis has compelled many countries that are reliant on a market economy to reconsider the very nature of the market itself. The market economy sometimes malfunctions due to market imperfections or market failures. The current crisis is a typical example that reflects a lack of elements to make the market work smoothly: low participation costs, clear market transaction rules, legal powers for their enforcement, and the abolition of informational asymmetry. By its nature, the market is a public good and provision of a framework to ensure that the market economy functions smoothly requires enormous costs. For the sixty years since World War Two, the global market environment has been maintained solely by the US in its capacity as superpower; the provision of the key currency and the cost of maintaining the market system have been paid by the US. As the world economy has globalized and financial transactions are more complex and internationalized, these costs have grown dramatically. The surveillance of international transactions also rapidly became more difficult as technology swiftly advanced. Those major changes in the global economic environment means that the US is not able to support the global market alone and the costs involved in maintaining the global market environment will have to be shared by other countries. At the same time, the current crisis has exposed the need for regional financial surveillance and support systems, as turmoil in a specific region s financial markets have spread rapidly to the world. Thus, constructing an international economic and financial system that is open and multi-tiered (encompassing global, regional, and national tiers) will be an effective means of dealing with crises. In other words, it will be necessary to form regional markets consisting of several countries grouped together, in a manner that complements global and domestic markets, and to develop more efficient and effective systems for handling economic crises based on these regional units. The construction of a multi-tiered system will also strengthen the global market, greatly benefiting the world. It should be emphasized that the new system should be open to other countries outside the region and not signify the formation of regional blocs, as in the 1930s. Instead, their position will unfailingly be consistent with and complementary to the global market. 30 ASIA-PACIFIC REVIEW V NOVEMBER 2009

Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect Two anticipated courses over the next 20 years There has been a large volume of debate on the future courses of international economic and financial systems. There are two main courses, both of which are based on the notions that the scale of the superpower US economy will decline relative to other countries and that the international economic and financial system cannot continue to be dependent on one nation. These two courses are not mutually exclusive, but rather are complementary. The first one, which is supported by a majority of discussants, is to reform the current system of the IMF and the World Bank, strengthening it with multiple countries. This can be interpreted as a partial reform to the existing system. This idea would involve replacing the dollar as the key currency with a basket of the principal countries currencies known as the SDR (the IMF s Special Drawing Right), as well as increases to countries financial contributions and advances to the IMF, and stronger guidelines on financial regulation and monitoring. In contrast to a single key currency system, the concept of making the SDR the key currency involves the principal countries currencies supporting the SDR in combination with one another. While this idea is not new, it was proposed by the Governor of People s Bank of China in March 2009 and invited considerable response from around the world. The new political framework proposed for promoting these reforms would involve a transition to a system of group leadership under the G20 (which consists of the G7 plus emerging nations), which was indeed regularized from the September 2009 meeting. An alternative course aims to switch to a system of multiple key currencies, constructing an open and multi-tiered international economic and financial system. This new system is essential for the sustainable and stable development of the Asian region, which would establish a third economic pole in Asia. To do this, this course anticipates the future introduction of an Asian common currency to go alongside the dollar and the euro, and would support the global economy and complement the US and Europe. There would be a disadvantage in that the currency exchanges involved in a system of multiple key currencies would be inefficient; however, there are major advantages in that the system is intended to stabilize the external value of currencies through currency competition and mitigate exchange risks in the Asian region that are vulnerable to the effects of economic fluctuations outside the region. Cooperation between countries that join the common currency will be required for the formulation of monetary policy, which will result in discipline in terms of external monetary policy. Due to the inertia in the key-currency system, the switchover to a system of multiple key currencies would not be immediate. But, as the major growth center, it is vital that the Asian region strive to resolve the crisis with a common political will by both shoring up the existing system which revolves around the dollar and ASIA-PACIFIC REVIEW V VOLUME 16, NUMBER 2 31

Satoshi Shimizutani creating a third economic pole in Asia to complement it. The introduction of a common currency will require the promotion of political dialogue and a raft of processes including the strengthening of fiscal, monetary, and economic policy cooperation. Asian common currency as resolution of economic integration in the region The process for introducing an Asian common currency The introduction of an Asian common currency will be a long-term endeavor, requiring strong political will within the region and considerable time and effort. The background to the euro was the political will to construct mechanisms to ensure that disastrous wars would never occur again between the nations of the region. In contrast to the euro which was motivated by political reasons, the idea of an Asian common currency is encouraged primarily by economic reasons. The Asia region has some powerful economies and has observed greater mutual dependence between the countries of the region under globalization, a fact that is symbolized by the many FTAs concluded (mainly involving ASEAN). In order to realize a common currency, Japan and China as two of the largest economic powers in the world should expand their collaboration as key players and cooperate with South Korea and other Asian countries. However, the enormous diversity among Asian countries encompasses not only development stages and economic systems but also political systems, history, and culture. Moreover, there are currently no FTAs among the large economies of Japan, China, and South Korea. Thus, it would be advisable for Asia to take a gradual approach and proceed with integration beginning with countries and fields that are able to introduce these institutions. In addition, since the building of regional coordination mechanisms, institutional integration, reconciliation of interests, and key currency inertia are all factored in, the introduction of a common currency will necessitate the completion of many different processes. For the next 20 years the emphasis should be placed on building complementary economic institutions that are oriented to a common currency by way of preparation, characterized as one new multi-tiered framework for financial surveillance and another one for a regional financial support system. First it will be essential to earnestly address the issue starting afresh and build a financial surveillance framework which lays new foundations for a market economy in which information flows properly and which prevents businesses that use the uneven distribution or manipulation of information from coming into being. To do this, it will first be necessary to proceed with strengthening the current IMF/World Bank system in parallel with rebuilding a new framework within the G20. Although there has been much discussion in the current crisis questioning the wisdom of proceeding with financial transactions, to impose 32 ASIA-PACIFIC REVIEW V NOVEMBER 2009

Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect unnecessarily tight controls on financial transactions could do more harm than good since financial transactions by their nature markedly improve the efficiency of the economy if they work properly. Second, it will be necessary to construct multi-tiered financial support systems. The first order of business will be to rebuild the Chiang Mai Initiative and to enhance and strengthen the function of the Asian Development Bank. Under the Chiang Mai Initiative, which was based on the lessons learned from the Asian Currency Crisis in the latter half of the 1990s, 30-billion-dollars worth of swap agreements were concluded; however, 80% of these were linked to the IMF, making them difficult for Asian countries to use. Thus, rebuilding of the Chiang Mai Initiative and greater strengthening of the Asian Development Bank is necessary to develop a framework for loans and financial support in the region. The objective should be to create an open system that is designed to be consistent with the global financial system, and which is also based on a mode of financing in accord with Asian regional characteristics. The strengthening of financial surveillance and support systems in Asia will represent the first stage in realizing a common Asian currency and will consolidate the foundations for achieving this. At the second stage, it will be essential to establish a common Asian currency unit (ACU) that encompasses the yen, the yuan, the won, and other Asian currencies, and to aim to make its use effective. It will also be necessary to construct a framework for policy coordination by promoting political dialogue; monitoring of regional macro-economic and financial trends, establishment of a financial system involving ACU accounts settlements, and liberalization of international movement of production factors. It will not be possible to introduce an Asian common currency until all these efforts have been made. Advantages of Asian common currency within the region The introduction of an Asian common currency forming a third economic pole will also involve a number of economic and political advantages for Asian countries. Economic advantages will include the greater efficiency and stability in the regional economy engendered by trade and capital transactions. First, the introduction of a common currency is enormously advantageous in reducing vulnerability to exchange rate fluctuation. The volume of international trade has expanded substantially in the Asian region and the web of the production network has extended. Most transactions are settled in dollars; however, Asian economies are more vulnerable subject to fluctuations in the exchange rate against the dollar. In Europe as well, during the current financial crisis, the currencies of the UK and Iceland countries that have not adopted the euro have suffered greater depreciation than the euro itself. Forming a larger currency union mitigates vulnerability to exchange rate fluctuations outside the region, which is especially the case for smaller countries. ASIA-PACIFIC REVIEW V VOLUME 16, NUMBER 2 33

Satoshi Shimizutani Second, the introduction of an Asian common currency would represent a path that enabled the issue of bonds denominated in the regional currency and served to rectify international disparities. Since the direct capital markets in the Asia region are underdeveloped, most of the deposits in Asian countries are put out to international financial centers and domestic investments as well as capital transactions within the region are often denominated in dollars, resulting in a double mismatch between currency and maturity. This structure also serves to foster disparity in that excess savings in the Asia region go to cover the USA s current account deficit. Third, the independent construction by Asia of its own financial monitoring and support systems will make the global economic and financial system more solid and enable the development of market economies in tune with Asian regional characteristics. The political advantages include promotion of mutual understanding and smoothing of political coordination within the region, which would contribute to a sense of Asian identity. Europe engaged in political coordination with a view to fulfilling higher common interests that transcended the individual interests of the different countries involved and the euro served to solidify a shared sense of European identity when it came into circulation. A common currency will not only strengthen the economic ties between the participating countries but will also enhance the political cohesion between them. Since political discord would lead to instability in the external value of the currency, the creation of a third economic pole in Asia will play an anchoring role in the promotion of political stability in the area. While there will be many shared hardships encountered on the road to achieving this, the process of political coordination will deepen mutual understanding and strengthen bonds between nations, bringing about the dual political and diplomatic benefits of promoting and intensifying regional dialogue and contributing greatly to the stability of the Asian region. Fomenting a common Asian identity that smoothes political coordination in the region will likely enable the formation of a unified political will in Asia, and facilitate the expression of Asia s political inclinations on the global political stage. Advantages of Asian common currency to the world The introduction of an Asian common currency will also entail major economic and political benefits beyond the Asian region. In terms of economic benefits, it will make economic growth in the Asian region more efficient and more stable, and will create more promising markets for the rest of the world. Moreover, for smaller scale economies, circulating a major currency will stabilize trade and capital transactions, and will increase the stability of the entire global economy. Those arguments are based on the lesson from Europe where there are indications that the appearance of the euro has helped to stabilize the global economy. Asian common currency alongside the euro to complement the dollar would entail great economic benefits for non-asian countries as well as for Asian countries. It would 34 ASIA-PACIFIC REVIEW V NOVEMBER 2009

Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect also bring about a higher level of global stability in currency values and instill discipline in countries external currency policy. Moreover, in the course of the introduction of a common currency, the process of liberalizing economies would be expedited (including the liberalization of regional trade and capital transactions), which would facilitate increased access to Asian markets, and the liberalization of global trade and capital transactions would promote extra momentum. The introduction of an Asian common currency would also likely provide a means for excess savings in the Asian region (in particular in Japan and China) to be used within the region at first hand, which would contribute to mitigating global imbalances. In terms of political advantages, introduction of an Asian common currency would make it more difficult for political conflict to occur within the region, increase political stability within the Asian region, and contribute to global political stability. Specifically, there would be smoother political coordination between fractious regional countries and mechanisms will operate to stimulate external activities rooted in the interests of all the countries in the region. Since it would be necessary to try and stabilize the common currency s external value, the currency would not be based on the interests of one country alone. As an extension of these mechanisms, multilateral collaboration would likely enable the countries of Asia to take rational collective positions in negotiations with countries from outside the region. If the countries of the region collaborate on fiscal, monetary, and economic policy, this will at the same time necessitate greater transparency in each country s political decision-making and policy-making processes, and is thus likely to stimulate democratization and liberalization within the region s nations. It will be important for countries with large scale economies to show strong political will and cooperate with one another in realizing an Asian common currency. Among the countries, Japan is a country whose currency, monetary, and economic policy-making processes are clearly set out under distinct rules, and which, with its long traditions of democracy, liberalism, and free market economics, shares common values with the nations of the West. China has intensified its economic relationship with the US and is playing a key role as a stakeholder in the international community. If Japan and China can walk in step with one another and take active roles in building a framework to achieve this goal, this would seem to hold enormous political significance for the achievement of global stability. Roadmap to the introduction of an Asian common currency We turn to the third issue: how to make progress toward the introduction of an Asian common currency. With emphasis on Japan s active role, herein is ASIA-PACIFIC REVIEW V VOLUME 16, NUMBER 2 35

Satoshi Shimizutani presented a roadmap dividing four periods: prerequisites as short-term initiatives, followed by three stages as medium and long-term initiatives. Prerequisites Before we make steady steps toward the introduction of an Asian common currency, urgent policy issues should be solved to overcome the current crisis: embarking on global economic recovery from a once-a-century historical slump and disposing of the astronomical amount of non-performing loans that accumulated during the financial crisis, both of which are strongly correlated. There has been a bulk of measures to stimulate the economy and create new jobs. However, what is complex in this crisis is that expansive traditional fiscal or monetary policies could be only a partial measure and should be complemented by restructuring the battered financial system. Thus, the urgent policy agenda includes disclosure and understanding of the non-performing loans that have surfaced during the crisis, and the construction of an international framework under the close oversight of the financial authorities. Under these conditions the major nations have engaged in lengthy discussion on currency and on how to deal with the financial crisis. However, the countermeasures proposed in the first and second financial summits were inadequate to the task of resolving the current crisis including fleshing out the technical details. Resolution of the crisis urgently requires the creation and implementation of an international framework for quickly comprehending the scale of the non-performing loans generated by the crisis, fully disclosing them, and placing them under the close monitoring of the financial authorities. Even if the total losses greatly exceed the predictions, frank disclosure of the losses in their entirety represents the first step towards a solution. Japan s experiences in the 1990s involving the disclosure of non-performing loans and thorough oversight by the financial authorities proved to be effective tools in the wake of a capital injection. These reforms will encourage a market consensus that there will be no increase in non-performing loans and the situation will grow no worse. This is the starting point for economic recovery. One of the indicators of this will be reversal in US housing prices, the origin of the current crisis, which is widely discussed to continue until 2010. However, it takes a long time to dispose of the enormous amount of non-performing loans. The first half of the 2010s (2010 2014) is designated as the period for the disposal of non-performing assets. Through international cooperation, a whole raft of policy measures should be employed which include capital injection, the disposal of non-performing assets, supply of liquidity, increased deposit insurance, and the promotion of mergers between financial institutions. At the same time, as mentioned above, the current IMF/World Bank system should be reinforced and a new framework developed within the G20, in view of the need to construct a new international financial oversight and support 36 ASIA-PACIFIC REVIEW V NOVEMBER 2009

Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect system and the need for uniform regulation standards based on a review of the current financial crisis. To reiterate, a system must be arranged for providing rapid assistance to Asian countries plunged into crisis, through the rebuilding of the Chiang Mai initiative and the expansion and reinforcement of the Asian Development Bank, and efforts to establish a financial oversight and support system for the Asian region must proceed. In order to support the development, Japan must provide the key to resolving the financial crisis by communicating lessons learned in the 1990s to the world and using its abundant foreign exchange reserves to supply liquidity in a flexible manner to countries that lack capital. In the 2010s, the global economy will probably emerge from the worst period. To achieve this, it will be necessary to coordinate all kinds of policy devices to dispose effectively of non-performing loans as quickly as possible, and to spare no efforts in collaborating internationally to repair the battered financial system in the first half of the 2010s. The current crisis has exposed the shortcomings of not only the international financial supervisory system but also of nations domestic financial supervisory systems. In an environment where financial technology itself has very rapidly developed and where financial transactions are both complex and conducted on an international scale, a new international framework for effective financial oversight is required. This is one of the key lessons to be drawn from the current crisis. Stage One: building regional cooperation mechanisms in the 2010s Along with cleaning bad heritage in the 2000s under the financial crisis, Asian countries should build regional cooperation mechanisms during the 2010s. The 2010s represents a period of preparation and consolidation of the foundations for Stages Two and Three. First, it will be necessary to achieve firm agreement between Japan, China, and South Korea on the realization of a common Asian currency unit (ACU), which is the initial step towards the introduction of a common currency. In order to popularize the development, it will be necessary to establish a council consisting of Asia s central bank governors and finance ministers and to put the matter up for detailed discussion among other Asian countries (principally the ASEAN nations). Second, it will be necessary to strengthen cooperation on fiscal, monetary, and economic policy between countries, and to construct a monitoring function for regional macro-economic and financial trends and a financial support program as an open and multi-tiered system. On top of those arrangements, it will be essential to prepare the ground for the realization of a common Asian currency unit, by promoting the convertibility of countries currencies, minimizing exchange controls, changing over to a floating exchange rate system, and guaranteeing the independence of central banks. Conclusion of regional EPAs and FTAs (including agreements between Japan, China, and ASIA-PACIFIC REVIEW V VOLUME 16, NUMBER 2 37

Satoshi Shimizutani South Korea) should be also promoted, barriers to the free movement of capital within the region should be eliminated, and Asian capital markets should be cultivated and strengthened. There is large room for Japan to take a lead in the development. Japan itself would first establish a headquarters in the government for the promotion of an Asian common currency system and call for regular consultations between the economic ministers of Japan, China, and South Korea as early as possible during the 2010s in an attempt to reach agreement on a course towards introduction of a common Asian currency unit. Japan would then organize the meetings of the council of Asia s central bank governors and finance ministers, so as to popularize the concept among other Asian countries, establish an Asian common currency system task force comprised of experts, and investigate the technical issues and seek solutions to them. Japan will also work to gain the understanding of the non-asian countries on the introduction of an Asian common currency and proceed to strengthen monitoring functions for economic trends and support structural changes geared towards liberalization. Japan s role is also emphasized on promotion of the development of direct financial markets in Asia through strengthening the function of the Tokyo market through the flotation of bonds denominated in Asian currencies and supporting the development of regional business networks. Stage Two: establishing an Asian currency unit (ACU) in the 2020s The main objective for the 2020s (Stage Two) will be to establish an Asian currency mechanism (the precursor to an Asian central bank) and to realize a common Asian currency unit consisting of the Japanese yen, the Chinese yuan, the South Korean won as well as the currencies of other Asian countries. In addition to the construction of an ACU settlement mechanism, the effectiveness of the ACU should be increased through promotion of its private use and the promotion of the issuance by international institutions of bonds denominated in the ACU. To support making the ACU effective, Japan should make use of its foreign currency reserves to actively invest in the newly established Asian currency mechanism and switch over to denominating yen loans in ACUs and actively promote the issue of bonds denominated in ACUs, the use of domestic savings and overseas and domestic investment denominated in ACUs. In parallel with the realization of a common Asian currency unit, it will be necessary to promote greater regional integration in terms of international trade in both goods and services and capital transactions with deregulating international movement of skilled workers. To support these developments, the regular meeting of finance ministers and central bank governors must be upgraded to an Asian summit meeting. The 2020s is to be a final adjustment period before the realization of a common Asian currency, which is expected to take place in the 2030s and 38 ASIA-PACIFIC REVIEW V NOVEMBER 2009

Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect onwards. It will be necessary to continuously promote international accord within international finance and trade institutions. It will also probably be necessary to build consensus with countries outside the Asian region, such as the US and the nations of Europe. Stage Three: introducing an Asian common currency in the 2030s and onward The 2030s onwards represents the final step (Stage Three): the introduction of an Asian common currency. First, the countries which take part in the new currency system will first need to lay the groundwork and build domestic consensus for the introduction of a common currency. When the euro was introduced in Europe, there were countries that could not obtain domestic agreement on joining the currency and so put it off. It would be advisable for any country finding itself in this position to fulfill its obligation to explain the pros and cons of introducing a common currency and to take its time in building a consensus. Second, the new central bank and new currency should be established. Once domestic consensus has been reached to participate in the new system, the currency sovereignty of all participating countries will be transferred to the Asian central bank, and an Asian common currency will be created. Exchange rates will be frozen for a certain time and the rate of exchange between the Asian common currency and each country s currency will be fixed. Unified Asian central bank policies will then be formulated and the single currency introduced. In order to build momentum for the introduction of an Asian common currency, Japan should show other Asian countries the way in terms of building national accord for a common currency, and to attempt to achieve unity of purpose. As a country with long democratic and liberal traditions, Japan must also contribute by promoting understanding in non-asian countries for the introduction of a common currency. Concluding remarks This article revives the idea of an Asian common currency as regional architecture of the international economic and financial system in the next generation, which complements to the global arrangement. As the growth center in the twenty-first century, Asia s presence in the world surely will be enhanced and the key to global peace and stability resides in whether or not political and economic stability can be achieved in the region. This article emphasized some of the advantages of constructing an open and multi-tiered system in Asia with introduction of an Asian common currency, both economically and politically, for both the Asian region and the rest of the world. ASIA-PACIFIC REVIEW V VOLUME 16, NUMBER 2 39

Satoshi Shimizutani Realization of an Asian common currency represents a fifty-year-long grand design. Rome was not built in a day but the longest journey begins with a single step. In this process, Japan is expected to have a large role to introduce an Asian common currency so as to bring about greater stability, development, and cooperation in the global economy through shared values. Liberalism, democracy, and capitalism will form the foundations of the future global economy but they are no more than the necessary conditions. In particular, Japan should pursue its traditional fortes of environmental protection, development assistance, and the promotion of science and technology, in that they embody such shared values. In addition, Japan s role must include actively applying its experience and knowledge from the financial crisis of the 1990s in contributing to the construction of a new international financial system. The recent change of administration in the US likely represents a favorable opportunity for doing so. To this end, Japan must make a high-profile contribution by dispatching large numbers of highly specialized personnel particularly in the fields of science and technology, the environment, and finance. The Japanese have a far-sighted tradition of free market economics, which places importance on the environment and is highly ethical. Against this backdrop of long tradition, establishing an independent strategy with a long-term, global, and historical perspective is exactly what is now required of Japan. Although there are various obstacles to the realization of a common currency, strong political leadership can likely overcome the hardships, and the creation of a common Asian symbol could be the perfect encapsulation of the next generation s aspirations for the future. We observed an historical change in Japanese politics and new Prime Minister Yukio Hatoyama supports the idea of an East Asian Community including the introduction of an Asian common currency. It is precisely now, in the bleakest hours of the crisis, that national discussion must be sparked and hope for the future ignited. Note In 2008 the Institute for International Policy Studies (IIPS) embarked on an indepth research project on the global financial crisis. This project was led by IIPS Chairman Yasuhiro Nakasone. Results of the research were released in a March 2009 report entitled Prospects for the Global Economic and Financial System in the 2030s. This article for the Asia-Pacific Review is based on that paper. The author would like to express gratitude to IIPS Chairman Nakasone for inspiring discussion and valuable input toward completion of that report. The author acknowledges contributions toward finalizing the initial report made by Atsuko Nishigaki, Kazumasa Oguro, and Jun Osawa. This article has been extended with the inclusion of analysis and the personal views of the author, and the latest developments in international economic and financial systems. The views expressed in this article are personal. 40 ASIA-PACIFIC REVIEW V NOVEMBER 2009

Asian Common Currency as a Driving Force of Economic Integration in East Asia: A Prospect About the author Satoshi Shimizutani is a Senior Research Fellow at the Institute for International Policy Studies (IIPS). His research has focused on the Japanese economy. He joined the Economic Planning Agency (now called the Cabinet Office) and earned a Ph.D. in economics at the University of Michigan. He has written numerous journal articles on the Japanese economy and published two books in Japanese: Kitai to fukakujitsusei no keizai gaku defure keizai no micro jissho bunseki [Expectations and Uncertainty in a Deflationary Economy: A Microeconomic Analysis of the Japanese Economy] (Nihon Keizai Shimbun Sha, Tokyo, 2005) and Kaigo hoiku service shijou no keizai bunseki micro data niyoru jittai kaimei to seisaku teigen [An Economic Analysis on the Elderly and Child Care in Japan: Micro-level Investigation with Policy Implications], co-authored with Haruko Noguchi (Toyo-Keizai Shimpo Sha, Tokyo, 2004). ASIA-PACIFIC REVIEW V VOLUME 16, NUMBER 2 41