john mage
Japan plots eastern currency bloc with China By Jeremy Warner in Tokyo
08 December 2003
Japan hopes to secure agreement for an Asian currency bloc that would include China by the end of this decade, eventually leading to complete currency union in the region, one of Japan's leading government bureaucrats has told The Independent.
In an interview, Hiroshi Watanabe, Director General of the International Bureau at Japan's Ministry of Finance, said he believed the formation of such a bloc might be the solution to the trade imbalances created by the pegging of the Chinese renminbi to the US dollar.
Mr Watanabe said there was virtually no chance of China abandoning the peg next year, but he hoped to see real progress in introducing flexibility by 2006. He believed China would eventually be convinced of the merits of more currency flexibility, and was concerned that without it, the Chinese economy would overheat, causing a damaging demand shock for the region as a whole.
One possible solution might be the flotation of the renminbi against a basket of Asian currencies, which would act as a catalyst for the formation of a wider currency bloc in the region. He agreed that full currency union would require "some democratisation" of China, but he expressed the hope that a single currency might be established within 25 years. "The leaders of 13 Asian countries already have some understanding we are going to formulate such a currency", he said. "Maybe by 2008 we could get into a discussion with China about how to bring about an Asian currency unit".
A vital pre-cursor would be the formation of economic partnerships and free trade agreements between east Asian nations. Japan has been pursuing a policy of heavy intervention in foreign exchange markets, selling the yen and buying dollar assets, in order to depress the yen's value against the dollar and keep the currency competitive with the Chinese renminbi. Export success, particularly to China, has been a key factor in Japan's still nascent economic recovery, and the Ministry of Finance is determined that it should not be stalled by undue currency appreciation.
Mr Watanabe said there was no specific target for the yen, but the MoF was looking to stabilize the currency in the range of 108 to 110 to the dollar, which he considered still overvalued for Japanese industry. Japan's larger, internationally competitive companies could live with a much higher exchange rate, but even Toyota might struggle with less than 100 yen to the dollar and for medium sized enterprises and the service sector, any further appreciation in the yen would be painful.
Mr Watanabe professed himself "somewhat puzzled" by the European Central Bank's apparent willingness to tolerate the steady appreciation of the euro against the dollar. Like Japan, the core European economies need lower interest rates and a depreciating currency.
Officials at the Bank of Japan and the MoF stress there is no possibility of Japan abandoning its zero interest rate policy for the foreseeable future. Mr Watanabe said there was no danger of the policy being lifted for the next year at least. Zero interest rates are being supported by the injection of massive amounts of liquidity into the money markets. Mr Watanabe said that all the money spent on currency intervention was being left in the market, further boosting the money supply.