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Emerging Markets

Point counterpoint

Japan is again pushing hard for an Asian Monetary Fund. But unlike a decade ago, this time it is seeking pan-Asian support, crucially from China

An Asian Monetary Fund (AMF) is an idea whose time has come. That’s the view gathering pace in Asia as Japan’s new government, which swept to power at the end of August on the back of an avalanche of popular support, looks set to revive the initiative that Tokyo took in 1997.

But this time it is likely to be a more ambitious project than the one proposed – unsuccessfully – 12 years ago, at the height of the Asian crisis. Crucially, it will have the backing of China.

At the core of the scheme will be the so-called Chiang Mai Initiative Multilateralized (CMIM), scheduled to begin operation by the end of the year as a jointly administered common pool of regional funds that began life in 2000 as a network of bilateral currency swaps. But the “AMF Mark II” may expand the functions of the CMIM well beyond this emergency financing facility.

The idea of such an expanded fund has support in high places. Ban Ki-moon, the UN secretary-general, recently endorsed the idea, saying that an AMF “could complement the IMF in helping countries respond to financial and economic shocks, and it could promote investment in regional transport infrastructure and social protection.”

Architect of the 1997 initiative and former ‘Mr Yen’, Eisuke Sakakibara – a key adviser to Japanese prime minister Yukio Hatoyama’s Democratic Party of Japan (DPJ) in its victorious election strategy – told Emerging Markets before the landmark August 30 election that the DPJ would almost certainly revive the idea of an AMF.

The plan which Sakakibara announced in 1997 at the height of the Asian financial crisis was for a $100 billion Asian fund that would work alongside the IMF. But this came in for strong opposition, not least from then-US Treasury official Lawrence Summers, who effectively blocked the move, and from the IMF.


As Sakakibara, then Japan’s vice finance minister for international affairs, confided afterwards when the 1997 plan was abandoned in favour of less ambitious initiatives, one of his critical mistakes was not to seek Chinese support before announcing his grand design.

This time, Japan will not make the same mistake, he tells Emerging Markets.

Unlike the situation in 1997, Chinese support appears likely to be forthcoming now – provided any new initiative is presented as a pan-Asian one and not as a move to achieve what Beijing saw originally as a move by Tokyo to achieve “yen hegemony” in Asia.

Yang Jiechi, China’s foreign minister, has stressed the importance of regional self-help among east Asian nations. “We should vigorously intensify financial cooperation among the Asean+3 countries of Japan, China and South Korea,” Yang told a recent meeting of foreign ministers from the group.Thailand is another supporter of regional monetary initiatives in Asia. Vitavas Srivihok, director-general of the Asean Affairs Department in the Thai foreign ministry – this year’s chair country of Asean – says he aims to implement the $120 billion CMIM during a summit of the 10-nation south-east Asian nation group on October 23.

“CMI multilateralization will eventually lead to some kind of Asian Monetary Fund,” says Sakakibara, adding that the new Japanese government is likely to propose new moves to this end. “Once they earmark foreign reserves of each country and jointly manage those reserves, it will be one form of what I proposed a decade ago,” he says.

“Using such funds in emergencies for providing liquidity is just one function, but there are other functions such as coordination of foreign exchange policy and monetary policy that could be carried out by an AMF,” says Sakakibara.

Chinese and Philippine officials have envisaged a future Asian Monetary Fund as a kind of multi-purpose vehicle capable of pooling some of east Asia’s huge foreign exchange reserves – which total well in excess of $3 trillion – to help finance infrastructure and other regional projects, in addition to providing short-term financing.

But some experts have warned that the multilateralization of the CMI should complement, rather than supplant, the IMF’s role.

Writing in Emerging Markets, Randall Henning, visiting fellow at the Washington-based Peterson Institute for International Economics, said that while “the US and Europe cannot legitimately object as a matter of principle” to the progress of the CMI, since they maintain their own balance-of-payments and liquidity facilities, the terms of financing of any new fund “should be determined on the economic merits, not by bureaucratic competition among alternative facilities”.

Nevertheless, the idea of Asia’s foreign exchange reserves being put to more constructive ends than simply being deployed in US or other foreign securities is one that also appeals to IMF first deputy managing director John Lipsky, although what he has in mind is that reserve-rich Asian nations should use their wealth for domestic development and turn to the IMF if they need outside help.

Asia can afford to use some of its reserves for economic development now that the IMF is able to provide crisis insurance, says Lipsky, referring to IMF facilities such as the Flexible Credit Line (FCL) designed to provide conditionality-free access to sound borrowers in case of need.


It no longer makes sense for Asia to opt for self-insurance by maintaining large reserves, Lipsky says. But Asian nations are in no mood to turn to the IMF for help nowadays and it is notable that, of more than 30 emerging economies that have sought IMF help since the global financial crisis and economic recession began, less than a handful are from Asia.

Sakakibara is blunt about the reasons for this. Asian nations in general went into the current global crisis in good financial shape but “because of their past experiences at the time of the Asian financial crisis of 1997–1998, they would never ask the help of the IMF unless it was absolutely essential,” he says. “And I think they are right.”

IMF policy toward Thailand, Indonesia and South Korea at the time of the 1997 crisis was “absolutely wrong – terrible”, says Sakakibara. The IMF has learned some lessons since, he acknowledges, for example by dropping certain politically damaging structural economic reform demands, but memories of 1997 die hard, he says.

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