Chapter 3 Leadership of Japan and China Essential in theFormation of an East Asian Monetary Zone
[Key Points]
1. The Asian currency crisis proved to be a catalyst for full-fledged economic and financial
cooperation in East Asia. At present, following the examination of the direct and structuralcauses of the currency crisis, financial cooperation in the region is shaping up within suchframeworks as the Association of Southeast Asian Nations (ASEAN)+3 (Japan, China
and South Korea) and the Executives’ Meeting of East Asia and Pacific Central Banks(EMEAP).
2. The major initiatives for financial cooperation include the Chiang Mai Initiative,
surveillance and policy dialogue, and the development of the Asian bond market. While
all of these items are indispensable in forming a monetary zone in East Asia in the future,
consideration of the common exchange rate regime, which should be a central theme of
discussion, still remains in the study phase.
3. For the formation of a regional monetary zone, it is essential that Japan and China exert
their leadership. But both countries must overcome difficult domestic problems before
they can take up the leading role. South Korea is expected to complement the leadershipof Japan and China in a constructive manner, and, at the same time, share its successful
experiences in recent years with countries in the region.

Introduction
In East Asia today, regional cooperation at the official level is under way in various forms inboth the real economy and the monetary and financial field. While multilateral or bilateralnegotiations are going on over free trade agreements (FTAs) or economic partnership agreements(EPAs) covering from trade, investment and services to movements of people, financial cooperation
has already started in the region ranging from surveillance and currency swaps to efforts to develop
the regional bond market. These developments were unimaginable a decade ago.
From the perspective of history or political dynamics, these developments can be taken as partof the trend of regionalism as seen in the European Union (EU) and in the Western Hemisphere,
and also reflect the disappointment with multilateral frameworks such as the World Trade
Organization (WTO) and the International Monetary Fund (IMF). At the same time, the hardships
experienced in the Asian currency crisis provided the strong incentive for an acceleration ofregionalism in East Asia.1
1This chapter focuses on regional cooperation in the monetary and financial fields undertaken byvarious players and in various forms. There are three purposes: first, consider the significance ofthe financial cooperation initiatives in light of the causes and structural factors of the Asianfinancial crisis; second, review the principal organizations for regional cooperation in East Asia andtheir activities in the financial field and examine the importance of the framework of the
Association of Southeast Asian Nations (ASEAN)+3 (Japan, China and South Korea); and third,
consider what preconditions and additional components will be necessary for the future
establishment of a regional monetary zone and what roles Japan, China and South Korea shouldplay in that regard.

1. The Asian Currency Crisis the Starting Line for Regional Financial Cooperation
1.1 Causes of the Asian Currency Crisis
It has been established that the Asian crisis, where the currency crisis deteriorated into thefinancial and economic crisis, was caused mainly by capital account problems in the internationalbalance of payments (Yoshitomi, 2003). The conventional currency crises that occurred in Latin
America in the 1980s mostly stemmed from current account problems, including chronic trade
deficits due to excessive domestic demand. Unlike those 20th century-style crises, the Asiancurrency crisis “reflect problems of liquidity rather than solvency, and they involve severe
distortions in the domestic financial system.”2
The progress in research into the nature and causes of the Asian crisis helped rouse a sense of“East Asian” regional unity, which until then was unverbalized or intentionally disregarded (Terada,
2003). The crisis triggered a number of specific actions toward regional economic cooperation,
including a review of monetary and financial cooperation in the region. Prior to the crisis, regional
cooperation in the financial field was largely contained within the framework of ASEAN.3 But theseriousness of the crisis and how rapidly it was transmitted throughout the region prompted all
countries in East Asia to take action.

1.1.1

Direct Causes

In this section, the factors that proved to be the direct causes of the currency crisis and thefactors that helped exacerbate, albeit indirectly, the crisis such as the structural factors are clearly
distinguished. The main direct factors that triggered a massive outflow of capital by undermining
the confidence of foreign investors are closely related to macroeconomic mismanagement andadministrative flaws.
(I) Rigid Foreign Exchange Systems
Countries that faced the crisis effectively linked the exchange rates of their currencies to the U.S.
2

dollar, though to a varying degree. Thailand could not cope with changes in its export
competitiveness because it clung to the quasi-fixed exchange rate system. South Korea found itself
in a similar situation, though to a lesser extent, while Indonesia had the crawling peg system underwhich it devalued the rupiah, its currency, against the U.S. dollar little by little. It may be construed
as a logical development that East Asian countries with the high degree of dependence on foreign
trade tried to stabilize their currencies by pegging them to the U.S. dollar and other majorinternational currencies, and, as a result of that, formed the regional system of unintended fixedexchange rates. But this system proved to be vulnerable to currency speculation. Even when thedollar-pegged currency system was in place, those countries or areas that had abundant foreignexchange reserves, like Hong Kong, or those that kept tight exchange controls, like China andMalaysia, succeeded in defending their currencies.
(II) Outflow and Inflow of Short-term Capital
The problem common among the countries thrown into the currency crisis was the
exceptionally high ratio of short-term external debt to foreign exchange reserves, which in 1996
stood at 195.4% for South Korea, 167.2% for Indonesia and 110.3% for Thailand. Incidentally, forother East Asian countries, the ratio ranged from 67.9% for the Philippines to 2.6% for Singapore(Sussangkarn & Vichyanond, 2004, p. 46). The three crisis countries all had defective systems forcontrolling capital transactions. While South Korea maintained rigid foreign exchange controls,
financial transactions between banks and overseas subsidiaries of business corporations escaped theregulations and ended up with an accumulation of maturity mismatching between short-term fundraising and long-term investment. In Indonesia, capital transactions in the private sector were freefrom any control. In the case of Thailand, short-term capital flowed in and out of the country freely
via the Bangkok International Banking Facility (BIBF). In addition, the Thai government made thedisastrous mistake of simultaneously pursuing the “Impossible Triangle” 4 of three policy
objectives: independence of monetary policy, exchange rate stability, and liberalization of capitaltransactions.
(III) Inadequate Statistics on External Transactions
The high ratio of short-term external debt to foreign exchange reserves bears evidence of how
poorly external assets and liabilities had been managed prior to the crisis.5 Indonesia had neither
foreign exchange controls nor requirements for residents to report financial and capital transactions
to the regulatory authorities. As a result, even when the Indonesian government opted for external
asset-liability management, it could not find adequate basic statistics for external capital transaction
balances (Indonesia imposed reporting requirements after the crisis). When the South Korean
government faced a shortage of liquidity in foreign currencies in late 1997 and began negotiations
with foreign banks on the rescheduling of short-term debt, it was asked to disclose the most recent
3balance of short-term debt but could not do so because of the inadequacy of statistical data.
(IV) Liquidity Shortage and Insolvency (Bankruptcy)
The Asian currency crisis is generally believed to have been a liquidity crisis originating in
capital account balance problems, not the insolvency crisis stemming from current accountproblems. In general, that certainly was the case, but when the situation of each country is
examined in detail, the crisis in Thailand, where the Asian crisis started, had a stronger tinge of an
insolvency-triggered crisis, while the crises of other countries can be attributed to liquidity
shortages to a much greater extent. In 1995, Thailand’s current account deficit reached anunsustainable level equivalent to 8.1% of its gross domestic product (GDP). But Thailand held on
to the fixed exchange rate with no improvement in its current account, making the collapse in thesummer of 1997 inevitable. On the other hand, the Indonesian economy was fundamentally sound(a World Bank report in 1997), and its current account deficit in 1996, at 3.3% of its GDP, was still
manageable. In the case of South Korea, the won, its currency, was not the target of massive
speculation at the time, and the crisis emerged when the country was faced with a lack of foreign
currency liquidity after creditor foreign banks refused to renew its short-term debt. If East Asia hadat that time an adequate liquidity support mechanism in place, the extent and seriousness of thecontagion of the Asian financial crisis might have been mitigated even if the crisis itself could nothave been totally avoided.6

1.1.2

Structural Factors

When the IMF came up with the packages of financial support measures for the three countries
hit by the crisis, it instructed Indonesia and South Korea to carry out broad-based structural reforms,
ranging from the dismantling of family-owned businesses of government leaders to the enhanced
operational transparency of South Korean chaebols (conglomerates), as conditionalities attached toits support. These conditionalities gave rise to heated debate as to whether the imposition of
structural reforms with far-ranging political, economic and social impacts was appropriate in lightof the IMF support objective of a short-term recovery of external equilibrium. But the structural
factors addressed in this section are not those controversial problems but are financial problems
cited as the fundamental factors that exacerbated the crisis.
(I) The Weak Financial System and Inadequate Bank Supervision
In the first half of the 1990s, the liberalization of the financial sector went ahead rapidly in
Thailand and Indonesia in such areas as market access, the scope of operations, interest rates andforeign exchange controls. But financial supervision, i.e., prudential measures to ensure thesoundness of banks, fell far behind the liberalization. In South Korea, meanwhile, the financial
sector, which had been under the government’s rigid supervision and control (finance ruled by
4

officialdom), had little know-how and experience in risk management regarding credit risk, interest
rate risk and foreign exchange risk. The unprecedented shock of the Asian currency crisis, whichbrought about massive losses stemming from bad debt burdens and the realization of various risks,caused the financial systems to collapse in these countries, bringing the function of financial
intermediation to a complete halt. On the other hand, in Hong Kong, Singapore and Taiwan, where
the soundness of the financial system was maintained under stringent bank supervision, the impactof the Asian currency crisis was relatively minor.
(II) Underdeveloped Domestic Bond Markets and Dual Mismatch
Prior to the crisis, many East Asian countries followed sound fiscal policies with balanced
budgets or fiscal surpluses and had little incentive for the development of a government bondmarket.7 The underdevelopment of the government bond market, which serves as a yardstick forpricing marketable securities products (benchmark function), tends to constrain the development ofcorporate bond markets as well. Indeed, the capital markets in most countries in the region, otherthan the stock markets, were quite limited in scale.
With their access to the capital markets constrained, business corporations in need of long-term
funds for equipment investment had little choice but to turn to borrowing from banks at home andoverseas (long-term borrowings or rollovers of short-term borrowings). Commercial banks raised
short-term dollar or yen funds with low interest rates and lent these funds in foreign currencies, orafter converting them into local currencies, to business corporations. In this cross-border process,the dual mismatch emerged—the mismatch of currency between foreign and local currencies andthe mismatch of maturity between short-term and long-term funds. Ravenous demand for funds
backed by robust economic growth led to the accumulation of the dual mismatching, which
ultimately amplified the currency crisis.

1.1.3 International Background: Lack of Regional Financial Cooperation
Immediately before the outbreak of the Asian crisis, there were sporadic attempts of financial
cooperation, including concerted currency market intervention to support the Thai baht by themonetary authorities of Thailand, Singapore, Malaysia and Hong Kong in May 1997. The only
short-term credit arrangement that existed before the crisis, the ASEAN Swap Arrangement (ASA),
was not much help in the face of the sheer size of the currency speculation. Although the fragile
network of de facto dollar-pegged currency systems had been formed in East Asia, no mechanism
existed for region-wide liquidity support.
The lack of regional financial cooperation is quite a contrast to the experiences and institutional
setup of Europe. Since the introduction of the joint currency float system (the Snake) in 1972, theEuropean Community (EC) established and expanded its credit systems ranging from very5

short-term credit facilities with no strings attached to short- and medium-term credit facilities theuse of which required ex post facto consultations or collateral conditions. When countries in the
Snake or the European Monetary System (EMS) faced liquidity shortages or balance of payments
difficulties, they were able to overcome all those problems with the aid of the regional credit
systems alone, including the 1992-1993 European currency crisis. The last time EC member statesreceived financial support from the IMF was in 1977 when Britain and Italy used its standby credit
facilities.

1.2

Reponses of Japan, China and South Korea to the Asian Crisis

1.2.1 JapanThe IMF-led packages of financial support for the three crisis countries reached over $116.7
billion ($17.2 billion for Thailand, over $41.2 billion for Indonesia, and over $58.3 billion forSouth Korea), with Japan committing $19.0 billion, the largest among the supporting countries. The
support measures for Thailand were put together in Tokyo in August 1997 amid an air ofenthusiasm that may be described as a “sense of Asian unity” (Sakakibara, 2000, p. 180). China,
Australia, Hong Kong, Malaysia and Singapore pledged financial assistance of $1 billion each,while South Korea, Indonesia and Brunei promised aid of $500 million each. In October 1998,
when many countries in the region were still mired in the economic crisis, the New Miyazawa Plan
was announced. Of the $30 billion initiative, $15 billion was pledged in medium- and long-term
funds for supporting economic reconstruction, and the remaining $15 billion in short-term facility
was extended for trade finance, and partly for currency swap arrangements (totaling $7.5 billion forSouth Korea and Malaysia).
Japan also proposed the establishment of an Asian Monetary Fund (AMF) with a fund scale ofsome $100 billion, envisioning the participation of 10 countries in the region, including Australia.
The AMF scheme was supported by the ASEAN countries and South Korea, but failed tomaterialize as the Untied States and the IMF strongly opposed it and China and Australia did notsupport it when the scheme was officially put on the table in September 1997, when annual
meetings of the IMF and the World Bank took place in Hong Kong.
The reasons for the opposition or non-support, generally speaking, included concerns overpotential moral hazards, redundancy of liquidity support functions and a possible decline in theinfluence of the opposing parties in Asia. Antipathy toward the Japanese initiative, lack ofunderstanding the significance of the AMF scheme or diplomatic backstage deals may also haveplayed a part.
While Japan’s financial support was fully appreciated by the crisis countries, it cannot bedenied that Japan’s international influence dwindled in the course of the Asian crisis, reflecting the6growing weight of China and also in part the strategic partnership between China and the U.S.
administration of then President Bill Clinton. But the declining influence primarily stemmed fromJapan’s own problems, including the prolonged stagnation of the Japanese economy and thefinancial system instability. When the Japanese yen plunged to ¥148 to the U.S. dollar in thesummer of 1998, there even emerged worries that Japan could trigger a second Asian crisis by
inducing a competitive devaluation of currencies in the region. There were views that the bestprescription for the region’s economic reconstruction was Japan’s economic recovery and expanded
access to the Japanese market, but Japan was not in a position to meet those expectations at thetime.

1.2.2 China
China was the only major country in the region that could escape the direct impact of the Asiancurrency crisis due to its closed economic system. In contrast with Japan, China was also successful
in boosting its international influence in the course of the crisis. While countries in the region wereforced to devalue their currencies one after another, the Hong Kong dollar fought an uphill battle
against speculators and the Japanese yen plunged, the Chinese government declared it would notdevalue the Chinese yuan and stuck with the international pledge to the end.8 “Notwithstandingthat the 1994 Chinese devaluation of the renminbi was a significant factor in the Asian financial
crisis, the general view in the region is that China has behaved responsibly and cooperatively inefforts to mitigate the prospects of further financial volatility” (Dieter & Higgott, 2002, p. 38).
The AMF scheme was thwarted partly because of China’s non-support. It is not hard to imagine
that the United States and the IMF, since they are outsiders in the region, needed to draw a major
regional country to their side to scuttle the Japanese initiative that was against the U.S. interests.
“In the spring of 1999, China told Japan that it was not against the AMF, explaining that itpreviously said it was neutral toward the scheme because it did not fully understand its significance.
China said that it is not yet too late to consider the idea and would like to study it together withJapan and other countries” (Sinohara, 2004, p. 70). China’s about-face on the AMF can be viewed
as reflecting its strong desire to display its leadership with the region, as do its participation in the
Chiang Mai Initiative (May 2000) and Chinese Prime Minister Zhu Rongji’s proposal for theconclusion of a free trade agreement between China and ASEAN (November 2000). China’s shift
toward a positive stance on regional cooperation roughly coincided with the time when its
accession to the WTO became virtually certain.9

1.2.3 South Korea
South Korea’s experiences in the Asian crisis offer ample implications in various aspects when7

East Asia considers a regional monetary zone in the future. South Korea’s case is regarded as a
typical example of a crisis triggered by a liquidity shortage, not by an insolvency in the sense of
economic collapse. The IMF provided South Korea with financial support on an unprecedented
scale of over $58 billion ($21 billion from the IMF, $10 billion from the World Bank, and $5 billion
from the Asian Development Bank, plus, as second-line reserves, $10 billion from Japan, $5 billion
from the United States, and $8 billion from other countries), and also brought the great shock to
South Korea’s economy and society by imposing the controversial conditionalities to the financial
package. South Korea was the first among the countries hit by the currency crisis to make aneconomic comeback, and repaid in full the loans from the IMF in 2001. From immediately after thecrisis until now, South Korea has been contributing to regional financial cooperation withenthusiasm, in such forums as ASEAN+3 and the Asia-Europe Meeting (ASEM).

2. Current State of Regional Financial Cooperation
2.1 Regional Cooperation Organizations in East Asia
In an era of mounting regionalism, national interests may be undermined if countries cannot act
in “regional units” like the EU and the North American Free Trade Agreement (NAFTA). In East
Asia, there are no existing regional organizations carrying “East Asia” in their names. The
framework of ASEAN+3 is now being broadened beyond trade and financial matters to include
other important fields such as food, energy and health-related issues, and has the potential to beinstitutionalized in the future as the foundation of an “East Asian Community.” If that happens, itwould mean the development of an institutional environment favorable for the promotion ofregional cooperation in the form of a free trade area and a monetary zone (Terada, 2004).

2.1.1 ASEAN+3 Finance Ministers Meeting
In accordance with the “Joint Statement on East Asia Cooperation” issued after an informal
ASEAN+3 summit meeting held in Manila on November 28, 1999, the ASEAN+3 Finance
Ministers Meeting was established to exchange information on economic and financial matters andconsider regional cooperation in East Asia. The Finance Ministers Meeting has now developed into
the most important regional institution to give shape to regional financial cooperation, with its trackrecord including the Chiang Mai Initiative, Surveillance and Policy Dialogue Process, and the
Asian Bond Market Initiative as well as various research and training programs.
The “Joint Statement on East Asia Cooperation” is the fundamental document positioned as thestarting line for regional cooperation going forward. The statement’s section related to financial
cooperation reads: “(2) in monetary and financial cooperation, they agreed to strengthen policy
dialogue, coordination and collaboration on the financial, monetary and fiscal issues of common
8interest, focusing initially on issues related to macroeconomic risk management, enhancing
corporate governance, monitoring regional capital flows, strengthening banking and financial
systems, reforming the international financial architecture, and enhancing self-help and support
mechanisms in East Asia through the ASEAN+3 Framework, including the ongoing dialogue andcooperation mechanism of the ASEAN+3 finance and central bank leaders and officials.”10

Table 1. Developments in Monetary and Financial Cooperation Seen in the “Joint
Ministerial Statement of the ASEAN+3 Finance Ministers Meeting”
Time
2nd
meeting,
May
2000

Venue
ChiangMai

4thmeeting,May
2001

Honolulu

5thmeeting,May
2002

Shanghai

Key Developments
1. Agreed on the “Chiang Mai Initiative(CMI).”
2. Agreed to use the AEAN+3 framework
for monitoring capital flows.
3. Agreed to establish a network ofcontact persons to facilitate regional
surveillance.
4. Agreed to establish a network of
research and training institutions.
1. Significant progress in implementing
the CMI
2. Agreed to review the main principles ofbilateral swap arrangements (BSAs)
under the CMI in 3 years.
3. Agreed to exchange data on bilateralcapital flows on a voluntary basis.
4. Agreed to establish a study group to
examine ways of enhancing theeffectiveness of economic reviews andpolicy dialogues.
5. Agreed on efforts toward developing an
early warning system (EWS).
1. Significant progress in implementing
the CMI
2. The Study Group on economic review
and policy dialogue met twice, financeand central bank deputies will meetinformally once a year (the firstmeeting held in April 2002).
3. Seven countries agreed on bilateralexchange of capital flows data.
4. Asian Development Bank (ADB)
offeredtechnical
supportfordevelopment of a regional EWS.

9Japan, China, South Korea
Japan: Offered to provide technicalassistance in the financial sector
via the dispatch of experts.
China, South Korea: Offered technicalassistance to finance, banking andfiscal officials through training
programs.
Japan: Offered financial assistance inthe monitoring of capital flows
and the study of mechanisms topromote financial stability.
China: Arranged 2 training courses on
China’s economic reforms anddevelopment.
South Korea: Organized aninternational seminar on EWS,
proposed to organize a training
program on financial andcorporate restructuring.
Japan: Japan-ASEAN Financial
Technical Assistance Fund
(JAFTA) contributed tostrengthening capital flows
monitoring systems.
China: Plans to hold a seminar on
short-term capital flows in
Beijing, continued to arrange
training courses on China’s
economic reforms anddevelopment.

6thmeeting,
August2003

Makati7th
meeting,
May
2004

Jeju

1. BSAs under the CMI are likely to becompleted by year-end.
2. Agreed to strengthen ASEAN+3 policy
dialogue.
3. Agreed to set up the ASEAN+3 Finance
Cooperation Fund to support ongoing
economic review and policy dialogue.
4. Agreed to strengthen the Asian Bond
Market Initiative (ABMI).
5. Set up a research group to explore ways
to promote financial stability in theregion.
6. The ADB provided technical support
for EWS and ABMI.
1. The network of BSAs under the CMI
grew to 16, with the combined size
reaching $36.5 billion, financeministers agreed to review the CMI toenhance its effectiveness.
2. Set up 6 working groups (WGs) for
ABMI and the ABMI Focal Group tocoordinate WG activities.
3. The ADB assisted in conducting“studiesoncreditguarantee
mechanisms and regional clearing andsettlement mechanisms.”
4. The AsianBondsOnline website (ABW)
launched to disseminate information on
the region’s bond markets.
5. Agreed to undertake 4 more studies
following the first meeting (in March
2004) of the Research Group on
regional financial cooperation.

Japan: Made a financial contribution
to research groups to promote
financial stability, jointly
organized with the ASEAN
Secretariat a workshop on
monitoring systems for
short-term capital flows (Phase
II).
China: Continued to organize thetraining course on China’s
economic reforms anddevelopment.
Japan: Jointly conducted with
Malaysia a study on the“impediments on cross-borderbond investments and issuance,”
JAFTA provided technicalassistance for regional bondmarket development, capital
flows monitoring, andcapacity-building for generating
and compiling more accurate andtimely data, Japan offeredfinancial assistance for 4 newstudies on financial cooperation.
China, South Korea: Co-chaired the
WG on “regional credit guarantee
and investment mechanism.”
China: Provided financial assistancefor 4 more studies on financial
cooperation, offered to continue
training courses on the regional
economy and financial
cooperation.
South Korea: Offered to provide
technical support fordevelopment of the regional bondmarkets.

Note: The third ASEAN+3 Finance Ministers Meeting was held in Prague in September 2000. (Thetable was prepared based on information obtained from the Ministry of Finance’s website, asof July 2004.)

2.1.2 Executives’ Meeting of East Asia and Pacific Central BanksThe Executives’ Meeting of East Asia and Pacific Central Banks (EMEAP) was launched in1991 at the initiative of Japan to “strengthen the co-operative relationships” among member
institutions, and now comprises 11 institutions.11 For the first six years after its establishment,
EMEAP held informal meetings behind closed doors. In 1996, however, the formal EMEAP
Governors’ Meeting was made an annual event, complemented by the Deputies’ Meeting and the10three Working Groups (currently, on Payment and Settlement Systems, Financial Markets, andBanking Supervision).
“The financial crisis in Asia affirmed the importance of EMEAP activities, which have nurtured
the regional network of information exchange and mutual trust” (from “What is EMEAP” on the
EMEAP website). Despite this self-evaluation, EMEAP kept a low profile until recently and did not
publish its activities very much. EMEAP came into the spotlight when it announced the launch of
the Asian Bond Fund (ABF) in June 2003. In April 2004, EMEAP announced the second phase of
the Asian Bond Fund initiative (ABF2).
In the history of European monetary integration, the Committee of Governors of the central
banks played an important role, complementing the Council of Economic and Finance Ministers,and vice versa. For instance, the Committee of Governors maintained the margin of fluctuations ofcurrencies of countries participating in the European Monetary System (EMS) and undertook
currency market intervention when necessary, and also managed the very short-term credit facility
for financing market intervention as well as the European Monetary Cooperation Fund (EMCF)
with the function of settling debts and credits. The Committee of Governors was reorganized into
the European Monetary Institute (EMI) and then evolved into the European Central Bank (ECB). It
is hoped that the central banks of East Asian countries will play a positive role together with theASEAN+3 Finance Ministers Meeting in regional financial cooperation, either through EMEAP or
in some other institutional form.

Table 2. Developments in Regional Financial Cooperation Related to the Executives’Meeting of East Asia and Pacific Central Banks (EMEAP)
Time

Venue

1991-1996
July 1996

Unknown
Tokyo

July 1997

Shanghai

July 1998

Tokyo

July 1999

Hong Kong

Key Developments
Informal, closed-door meetings
1st Governors’ Meeting; agreed to hold the Governors’ Meeting annually
・Established the Working Group (WG) on Financial Market Development, theWorking Group (WG) on Central Banking Operations, and the Study Group(SG) on Banking Supervision.
･Agreed to hold the Deputies’ Meeting twice a year.
2nd Governors’ Meeting･Reached consensus on the operation of a Virtual Secretariat (see the note
below).
3rd Governors’ Meeting･Agreed that the financial crises in Asia affirmed the importance of EMEAP
activities.
･Reorganized the two WGs and the SG into three WGs (on Payment andSettlement Systems, Financial Markets, and Banking Supervision).
4th Governors’ Meeting･Welcomed the establishment of the Financial Stability Forum (FSF) and theparticipation of some countries from the region in the FSF.

11

July 2000

Seoul

July 2001
July 2002

SydneyKuala
LumpurJune 2003
July 2003
April 2004

Bangkok

July 2004

Singapore

5th Governors’ Meeting･Reaffirmed that the central banks and monetary authorities of member
economies should assist in establishing deep and broad capital markets.
･Stressed the importance of strengthening the monitoring of financial market
developments, including cross-border capital movements.
6th Governors’ Meeting
7th Governors’ Meeting･Established an information technology (IT) representatives’ meeting.
Announced the launch of the Asian Bond Fund (ABF) by EMEAP member
central banks.
8th Governors’ Meeting
Announced the structure of the second phase of the Asian Bond Fund (ABF2)
by EMEAP member central banks.
9th Governors’ Meeting･Held the first meeting (joint high-level seminar) of EMEAP, the European
Central Bank and Eurosystem National Central Bank Governors,
simultaneously with the 9th EMEAP Governors’ Meeting.

Note: The Bank of Japan performs the de facto secretariat function. (Prepared on the basis of
information obtained from the EMEAP’s website (http://www.emeap.org) as of July 2004.)

2.2 Regional Cooperation Organizations Cutting Across Other Regions
2.2.1 Asia-Pacific Economic Cooperation Forum
The Asia-Pacific Economic Cooperation (APEC) forum was established in 1989, and currently
has a total of 21 member countries and areas: Australia, Brunei, Canada, Chile, China, Hong Kong,
Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, thePhilippines, Russia, Singapore, Taiwan, Thailand, the United States, and Vietnam. APEC is aninter-governmental group based on nonbinding commitments to facilitate economic growth,cooperation, trade and investment in the Asia-Pacific region.
The relative importance of APEC for East Asian countries seems to have declined after theforum proved to be ineffective in responding to the Asian crisis and also because of the enhancedrole of ASEAN+3 as a regional institution. “APEC might be a forum in which members of aheterogeneous region might talk, but it does not represent a case of actual regional integration, or
indeed major regional policy coordination” (Dieter & Higgott, 2002, p. 8). However, the objectiveof establishing APEC still holds validity, and APEC has significance of its own in terms of thedepth of dialogue with the private sector (the APEC Financiers' Group (AFG), the APEC Business
Advisory Council (ABAC), and the Pacific Economic Cooperation Council (PECC)) and theinclusion of Taiwan as a member.12
At the request of the APEC Leaders’ Meeting held in Seattle in 1993, the APEC financeministers’ meeting was created in 1994 to exchange information and opinions on the regional
economy at large. At the 10th APEC Finance Ministers Meeting held in Phuket, Thailand, in 2003,
12

“Regional Bond Market Development” was addressed as one of the key themes. Furthermore, the
10 policy initiatives the finance ministers will review on a continuing basis include items useful inregional cooperation in East Asia, including “voluntary action plan for supporting freer and morestable capital flows,” “financial regulators training initiative,” “APEC finance and development
program to strengthen capacity building for APEC members in the areas related to finance anddevelopment,” and “development of securitization and credit guarantee markets.”

2.2.2 Asia-Europe Meeting
The first summit of the Asia-Europe Meeting (ASEM) was held in Bangkok in March 1996,
drawing together the heads of state and government from 25 countries. Participating from Asia
were 10 countries (ASEAN member states other than Cambodia, Laos and Myanmar, and Japan,
China and South Korea), while the 15 EU members and the European Commission joined in from
Europe. ASEM was established with the recognition that the link between Asia and Europe was
weak relative to U.S.-Europe relations across the Atlantic and the trans-Pacific APEC. ASEM
summit meetings take place every two years. The fifth ASEM Summit was held in Hanoi in
October 2004, and the next meeting is scheduled for 2006 in Finland. The expansion of the EU to
25 members in May 2004 gave rise to the issue of the expansion of ASEM membership. While theEuropeans regarded the inclusion of the 10 new EU members into ASEM as a self-evident courseof action, they opposed the inclusion of the three remaining ASEAN members, citing human rights
problems in Myanmar. As both sides failed to work out a compromise, the sixth ASEM financeministers’ meeting and economic ministers’ meeting set to take place in Brussels and Rotterdam,
respectively, in July 2004 were called off.
The first ASEM finance ministers’ meeting took place in 1997, and was held every two years
until the Kobe meeting in 2001, then every year starting with the Copenhagen meeting in 2002. At
the Kobe meeting, the finance ministers agreed on the “Kobe Research Project,” under which
research was conducted on the theme of regional financial cooperation to make use of the European
experience of monetary integration for future developments in East Asia. The results of researchwere reported at the Copenhagen meeting.

13

Table 3. ASEM Kobe Research Project: Research Areas andCountries, Institutions in Charge
Research Area
1. Exchange rate regimes in East Asian emerging economies and new
EU members
2. Currency system: Europe’s experience and its implication for East
Asia.
3. Strengthening of financial cooperation and surveillance.
4. Strengthening and integration of regional monitoring: method, stage
and sequence.
5. Prospects for the financial system in Europe and Asia: case studiesof Spain and China.
6. Regional currency systems and China.

Countries/Institutionsin Charge
Japan, France, ECB,
ADB, IMF
The Netherlands,
Thailand, ECB
Japan, South Korea,
China, Australia, IMF
EC、ADB
China, Spain, ADB
China, France

Source: Ministry of FinanceAt the fourth ASEM Summit in Copenhagen, an agreement was forged on the establishment ofa task force “towards a closer ASEM economic partnership.” The task force considered trade andinvestment as well as financial matters such as the development of bond markets in Asia, andsubmitted its final report and recommendations to the Hanoi Summit in 2004. The
recommendations of the Task Force for Closer Economic Partnership included the establishment of
a Virtual ASEAM Secretariat and issuance of bonds in a basket of currencies.

Chart 1. Where Major Regional Cooperation Organizations Stand

East Asia
U.S., Canada, Mexico(NAFTA), Latin
American countries

European Union
ASEAN+3

(E U)
ASEM

APEC
EMEAP

14

2.2.3 Others
In November 1997, immediately after the Asian Monetary Fund (AMF) scheme was aborted,
the United States, the IMF, Japan and other countries agreed to create the Manila Framework Group(MFG).13 The MFG members included Australia, Brunei, Canada, China, Hong Kong, Indonesia,
Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and the UnitedStates. The MFG was launched as a framework for coordinated support in place of the aborted
AMF scheme. In reality, however, it was a regional surveillance organization attended by deputies
to finance ministers and central bank governors, with administrative support coming from the
IMF's Regional Office for Asia and the Pacific. The MFG initially met twice a year, but thefrequency of meetings was reduced to once a year in 2003, and the MFG was disbanded at the endof 2004.
In June 2002, the Asia Cooperation Dialogue (ACD) was inaugurated at the initiative of Thai
Prime Minister Thaksin Shinawatra, with the first ministerial meeting held in Cha-Am in Thailand
with the participation of ministers from 17 countries of South Asia, West Asia, Southeast Asia andNortheast Asia.14 The ACD is designed for “an informal and free exchange of views from thestandpoint of Asia’s bargaining power by bringing out the potential of Asian countries andstrengthening the region’s competitiveness.” The ACD’s activities so far did not cover regional
financial cooperation to avoid the overlapping of activities by other existing regional institutions,but included meetings on several themes, such as the working group on the development of legal
systems. Given its pan-Pacific geographic coverage, the ACD has the potential to develop into a
regional institution of great importance in the future.

2.3 Current State of Regional Financial Cooperation
2.3.1 Chiang Mai Initiative“In order to strengthen policy dialogue, coordination and collaboration on the finance, monetaryand fiscal issues of common interest, focusing initially on the strengthening of our self-help andsupport mechanisms in East Asia,” the ASEAN+3 Finance Ministers Meeting agreed on the Chiang
Mai Initiative (CMI) in May 2000. The CMI, designed to build a regional network of bilateralcurrency swap arrangements to prevent and solve any currency crisis by providing needed liquidity,
consists of (i) the expansion of the existing ASEAN Swap Arrangement (ASA) and (ii) theestablishment of a network of bilateral swap arrangements between the ASEAN member countries
and Japan, China and South Korea.

15

Chart 2. Network of Bilateral Swap Arrangements under the Chiang Mai Initiative (as of theend of December 2003)

Total $36.5 billion$3 billion

Japan

Thailand

ASEAN Swap
Arrangement $1
billion$2.5 billion plus $1 billion

Malaysia$3 billion
Equivalent to$3 billion$3 billion$2 billion

Philippine$500 million

China

Equivalent to$2 billion$1 billion$1 billion$5 billion plus
$2 billion$1 billion$1 billion

Indonesia$1 billion$1 billion

Korea$1 billion

Note 1: ←→ indicates two-way swaps, → indicates one-way swap.
Note 2: Japan-South Korea and Japan-Malaysia swaps include swap
arrangements under the New Miyazawa Plan (Japan-South
Korea $5 billion, Japan-Malaysia $2.5 billion).
Note 3: Japan-China swap between the yen and the yuan,
China-South Korea swap between the yuan and the won,
China-Philippines swap between the yuan and the peso, allother swap arrangements between the U.S. dollar and local
currencies.

Singapore

Source: Ministry of Finance(I) The ASA was modified in November 2000, with the total size increased from $200 million to $1
billion and the participating countries expanded from the five countries of Indonesia, Malaysia, thePhilippines, Singapore and Thailand to include all ASEAN member states. The swap period is up to
six months, and can be renewed for a period not exceeding six months.
(II) By the end of 2003, a total of 16 bilateral swap arrangements were concluded (13 arrangements
were between the five ASEAN countries and Japan, China and South Korea, and threearrangements were among Japan, China and South Korea) for a combined size of $36.5 billion,
effectively achieving the initial goal.15 Currencies can be withdrawn for a period of 90 days underswap arrangements, which can be renewed up to seven times. The applicable interest rate is Libor(London interbank offered rate) plus 150 basis points (bp=0.01%), the level of interest rate is raisedwith each renewal up to 300 bps. A country seeking liquidity support can withdraw up to 10% of
the facility provided, but must accept collateral conditions linked to the IMF support program towithdraw the remaining 90%.
The CMI is of epoch-making significance as the first concrete mechanism for regional financial
cooperation in East Asia. But it still has at least three flaws to be fully effective in preventing andresponding to a currency crisis of the scale of the Asian crisis. First, the structure of the network of16

bilateral arrangements makes withdrawal procedures cumbersome, hampering the maneuverabilityof fund mobilization. Secondly, the combined size of the network of bilateral arrangements is too
small, in light of the scale of the $116.7 billion of support packages put together by the IMF to deal
with the Asian crisis. Thirdly, the requirement that withdrawals of the 90% of the facility must be
linked to an IMF program undermines the effectiveness of the CMI scheme as a whole, whether therequirement is designed to prevent potential moral hazards or was necessary to obtain theunderstanding of the IMF and the United States. Suppose Indonesia seeks liquidity support. If
Indonesia wants to borrow a total of $5 billion, it should first negotiate separately with Japan,
China and South Korea. If negotiations go smoothly, Indonesia can withdraw 10% of the entire
amount, $500 million immediately, but it has to wait until an IMF support program is worked out
before it obtains the remaining $4.5 billion.
The ASEAN+3 Finance Ministers Meeting held in Jeju, South Korea, in May 2004, agreed on
the need to undertake a review of the CMI to explore ways of enhancing its effectiveness. A
working group was organized under the joint chairmanship of China and Singapore to conduct thereview, and it is to report the outcome of the review to deputy finance ministers.

2.3.2 Surveillance and Policy Dialogue
The weakest form of financial cooperation is a simple exchange of information on economic
indicators and other matters of individual countries, not designed to influence other countries’
macroeconomic policies in any way. As regional cooperation increases in intensity, “surveillance”
that goes beyond the simple exchange of information to include opportunities to jointly discusscountry reports, or the process of discussions among members for peer pressure to avoid or mitigate
possible adverse effects of their respective domestic economic policies on the entire region,
becomes necessary (Montiel, 2004). For such surveillance to be effective, there should be aconsensus among members on the objectives of the surveillance, country reports should be
prepared based on reliable statistical data, the exchange of information and policy dialogue should
be conducted substantively and in a straightforward manner, and an outline of discussions held andsubsequent recommendations should be publicized.
In October 1998, the ASEAN finance ministers launched the ASEAN Surveillance Process tostrengthen the policymaking capacity through the monitoring of macroeconomic indicators andconsideration of sectoral social policies. The ASEAN Surveillance Coordination Unit (ASCU)
within the ASEAN Secretariat in Jakarta prepares the ASEAN Surveillance Report for discussion
by the ASEAN finance ministers during their peer review session twice a year. The AsianDevelopment Bank supports and participates in the Process.
In May 2001, the ASEAN+3 Finance Ministers Meeting agreed to introduce the economic
17

review and policy dialogue (ERPD) process. Under the ERPD process, ASEAN+3 finance andcentral bank deputies meet annually, making efforts to strengthen the process by taking thefollowing steps: (i) an exchange of data on capital flows; (ii) development of an early warning
system with technical support from the Asian Development Bank; (iii) capacity-building formonitoring and data compilation with financial assistance from the Japan-ASEAN Financial
Technical Assistance Fund (JAFTA); and (iv) establishment of the ASEAN+3 Finance Cooperation
Fund. But, with no separate secretariat to prepare country reports or no independent professionalorganization to support it, “the ASEAN+3 ERPD Process has not yet been as effective as it shouldbe” (IIMA, 2004, p. 70).
The fundamental reason why the ERPD Process is not functioning as intended appears to lie inthe lack of consensus on the relationship between the purpose of the Process and the CMI.16“Participating countries have little objection to the view that the CMI needs to have an independent
monitoring and surveillance system. The system is designed to monitor economic developments
within the region, function as an institutional framework for policy dialogue and coordination
among participating countries, and notify countries using bilateral swap arrangements of structuralreforms and policy changes. But participating countries failed to agree on the issue of surveillance,
and their accord was limited to the institutionalization of informal policy reviews and dialogue by
finance deputies. At the present stage of the CMI, many participating countries are hesitant about
creating an independent regional monitoring and surveillance organization as part of the CMI”
(Park & Wang, 2004, p. 3).

2.3.3 Development of Asian Bond Markets
The heavy dependence on bank loans for capital spending and other long-term funds, coupledwith the underdeveloped bond markets, exacerbated the Asian currency crisis through theconcentration of risk on the banking sector and the dual mismatches of investment and fund-raising
currencies and maturities. Referring to these structural causes of the Asian crisis, then Finance
Minister Kiichi Miyazawa called for the creation of an Asian bond market at the APEC financeministers’ meeting on May 15, 1999, saying, “We must solve the problem of currency and maturity
mismatches going forward through a reliable financial intermediation function by the establishmentof an efficient bond market.”
A research report by the Institute for International Monetary Affairs (IIMA) defines Asianbonds as “bonds that are issued by the government, quasi-government, financial institutions, or
non-financial corporations in Asian countries, denominated in an Asian currency, and issued, traded,
cleared and settled in Asian financial centers, such as Tokyo, Hong Kong, and Singapore” (IIMA,
2004, p. 72). This definition does not make a clear distinction between so-called Eurobonds (Asian18

currency-denominated bonds issued and traded in offshore financial centers, for example, Chinese
yuan-denominated Asian Development Bank bonds issued in Singapore) and foreign bonds (Asiancurrency-denominated bonds issued by foreign issuers and traded on Asian countries’ domestic
markets, for example, Chinese yuan-denominated bonds issued in China by the Asian Development
Bank). This distinction is important in discussions about the development of a bond market for
non-convertible Asian currencies (the Chinese yuan and many other currencies in the region) orconvertible Asian currencies countries of which are not forthcoming about their internationalization(the Singapore dollar, for example).

Table 4. Official Initiatives for Asian Bond Market Development
Asian Bond Markets Initiative（ABMI）

Promoter

Focus

ASEAN+3

Finance

Ministers

Meeting

EMEAP (Executives’ Meeting of East Asia andProcess

Pacific Central Banks)

Bond issuer-centered approach

Bond investor-centered approach

Efficient allocation of the region’s private
savings

Immediateobjectives or
activities

Asian Bond Fund Initiative(ABF Initiative)

Focus on improving the environment for an
expansion of bond issuers, issuance of local
currency-denominated bonds, bond market
development.
Achievements by the end of 2004 includeissuanceofthe
Malaysian
ringgit-denominated Asian Development
Bank bond, the Thai baht-denominatedcorporate bond guaranteed by the Japan
Bank for International Cooperation, South
Korea’s pan-Asia bond.

Utilization of foreign exchange reserves of theregion’s countries
In 2004, the ABF1, using a pool of part of theexchange reserves ($1 billion), invested indollar-denominated government bonds issued by
Asian countries.
Currently, the government bond investment fundfor local currency-denominated Asian bonds(ABF2) is under consideration. During 2005,
exchange reserves will be invested in two kindsof funds (for a total of $2 billion), which are to
be opened to private-sector investors later.

Sources: Ministry of Finance, newspaper articles, etc.

Government-level initiatives are essential in order to establish a regional bond market with thecomponent domestic markets of countries within the region that have common or harmonized rules,
market practices and other software and hardware infrastructures. The involvement of all
governments in the region is also important, because, unlike Europe, East Asian countries are quite
divergent in terms of the size and development stage of financial and capital markets. At present,
the important official initiatives for the development of Asian bond markets are (i) the Asian Bond
Markets Initiative (ABMI) of the ASEAN+3 Finance Ministers Meeting and (ii) the Asian Bond
Fund (ABF) initiative led by EMEAP.

19

(I) Asian Bond Markets Initiative17
The objective of the Asian Bond Markets Initiative (ABMI) is described as the development ofa regional bond market that is liquid for both bond issuers and investors, by making possible theissuance of bonds in a variety of currencies and maturities in large amounts as well as efficientsecondary trading in such bonds through improved market infrastructures including guarantee
facilities and bond ratings. The ultimate goal is to develop a market where Asian private-sector
issuers can place bonds denominated in Asian currencies and utilize private-sector savings in Asia
for long-term private capital formation.
The ABMI was first proposed by Japan at an informal ASEAN+3 meeting in December 2002.
Subsequently, six working groups were created on the basis of voluntary participation. The working
groups are consulting regularly with a wide range of market participants to ensure that the results of
their discussions meet the requirements of the private sector and investors. Currently, priority isgiven to the development of domestic bond markets of participating countries. The working groups,
which provide progress reports through the ASEAN+3 Finance Ministers Meeting process, ischaired by the following countries:(a) Creating new securitized debt instruments (Thailand)(b) Credit guarantee mechanisms (South Korea)(c) Foreign exchange transactions and settlement issues (Malaysia)(d) Issuance of bonds denominated in local currency by Multilateral Development Banks (MDBs),foreign government agencies and Asian multinational corporations (China)(e) Local and regional rating agencies (Singapore and Japan)(f) Technical assistance coordination (Indonesia, the Philippines and Malaysia)

Problems that should be addressed going forward include measures to encourage a wide variety
of bond issuers to use the market and medium- and long-term improvements in the market
infrastructures (both software and hardware). The following is the excerpt of the Chairman’s Press
Release on the Asian Bond Markets Initiative, announced at the ASEAN+3 Finance Ministers
Meeting held in Makati, the Philippines, on August 7, 2003.

A. Facilitating Access to the Market through a Wider Variety of Issuers
A robust primary and secondary bond market in Asia requires a wide variety of issuers andproducts that could be addressed by encouraging:(1) Sovereign bond issuance by Asian governments to establish benchmarks;(2) Asian government financial institutions to issue bonds in Asia to meet their financing
20requirements18;(3) The creation of asset-backed securities markets, including collateralized debt obligations(CDOs)19;(4) Bond issuance in the region by MDBs and government agencies20;(5) Bond issuance in the region for funding foreign direct investment in Asian countries21; and(6) The expansion of local currency-denominations of bonds- introduction of currency-basket
bonds.

B.

Enhancing Market Infrastructure to Foster Bond Markets in Asia
To develop efficient and deep domestic and regional bond markets, there must be a conducive

environment for the active participation of both issuers and investors. In this context, the following
issues merit further consideration:(1) Provision of credit guarantees through the active use of existing guarantors and the possible
establishment of an Asian Regional Guarantee Facility22;(2) Strengthening of the rating system by enhancing the role of domestic rating agencies, as well as
considering the possible establishment of an Asian Credit Rating Board23;(3) Establishment of a mechanism for disseminating information on issuers and credit rating
agencies24;(4) Facilitating foreign exchange transactions and addressing settlement issues on cross-bordertransactions25;(5) Enhancing capacity building through market research and technical assistance programs for thepromotion of policy dialogue and human resources development among member countries; and(6) Examining the legal and institutional infrastructure, such as company/corporate laws, securities
transaction laws and tax laws.

(II) Asian Bond Fund Initiative
EMEAP announced the launch of the Asian Bond Fund (ABF) in June 2003. The ABF, with an
initial size of $1 billion, invested in U.S. dollar-denominated bonds issued by Asian sovereign andquasi-sovereign issuers in EMEAP economies (other than Japan, Australia and New Zealand),managed by the Hong Kong office of the Bank for International Settlements (BIS). Foreignexchange reserves of East Asian countries have previously been invested primarily in European and
U.S. government bonds with high creditworthiness and liquidity. The creation of the ABF is
expected to contribute to the development of regional bond markets by bringing back some of thoseinvestments to bonds by issuers in the region. The ABF is likely to contribute to diversifying risk
and enhancing profitability of the reserve assets of EMEAP central banks, but also reduces their21liquidity. The entire amount of the initial fund of $1 billion had been invested by the second quarterof 2004.
In April 2004, the EMEAP central banks announced in a press release the progress of thedevelopment of the second phase of the Asian Bond Fund initiative (ABF2). The ABF2 will invest
in local currency-denominated bonds by sovereign and quasi-sovereign issuers in EMEAP
economies, and is also being designed in such a way that will facilitate investment by other public
and private-sector investors. In that sense, the ABF2 is expected to contribute to the development of
the regional bond markets to a greater extent than the first phase of the ABF, whose investment waslimited to dollar-denominated bonds. The press release said, “Individual EMEAP economies canleverage on the interest and momentum generated from the collective investment in ABF2 tofurther develop their domestic bond markets as appropriate. In connection with this, the relevant
EMEAP members will work with the relevant authorities to improve the market infrastructure byidentifying and minimizing the legal, regulatory and tax hurdles in their markets, thereby
facilitating the creation of fixed income products in the region.”26 In December 2004, EMEAP
released a press statement on the launch of the Pan-Asian Bond Index Fund (PAIF) and the Fund of
Bond Funds (FoBF), both of which invest in domestic currency bonds issued by sovereign andquasi-sovereign issuers in the eight EMEAP markets. These investment trust instruments represent
landmark attempts particularly because of the following points: 1. they effectively give currencies
of denomination convertibility, albeit on a limited scale; 2. they opened the way for nonresidents toinvest in domestic bonds of Asian countries; and 3.they are set be opened to private-sector
investors.

2.3.4 Research and Training Programs
Research activities and training programs have big roles to play in facilitating financial
cooperation in East Asia with only a brief history of regional cooperation. Through the ASEAN+3
Finance Ministers Meeting process, EMEAP, ASEM and other frameworks, Japan has been
financing many research projects either directly or indirectly via the Japan-ASEAN Financial
Technical Assistance Fund (JAFTA).
Japan, China and South Korea are actively participating in information exchanges, technicalassistance, seminars and workshops on human resources development, and other research andtraining programs in the fields of their respective strength or in line with their respective policy
intentions. Japan is the de facto driver in all areas of regional financial cooperation, particularly
focusing on the monitoring of capital flows, statistical data development and surveillance. China
and South Korea are contributing to regional cooperation by starting with developments of China’s
economic reforms and opening and South Korea’s experiences of financial and corporate
22

restructuring in the wake of the Asian crisis, respectively, with both countries gradually broadening
their areas of participation.

Table 5. Research Themes and Countries/Research Institutes in Charge of theASEAN+3 Research Group
Research Themes

Countries/Research Institutes in Charge

2003(1) Towards a Regional Financial Architecture
for East Asia

2004

(2) An Exchange Rate Arrangement for East
Asia(1) Economic Surveillance and Policy Dialogue
in East Asia
(2) Trade, Investment and Financial Integrationin East Asia
(3) Exploring Ways to Enhance the Functionsof the Chiang Mai Initiative in the MediumTerm(4) The Role of Private Sector Development inRegional Economic Growth and Financial
Integration

Japan (coordinator): Institute for International
Monetary Affairs
China: Chinese Academy of Social Sciences(CASS)South Korea: Korea Institute for International
Economy Policy (KIEP)
Thailand: Thailand Development ResearchInstitute (TDRI)
Indonesia: DRI
Japan (coordinator): Japan Center forInternational Finance (JCIF)
Philippines: UPECON Foundation
Malaysia: MIER
Singapore: Singapore Management University(SMU)
Japan: Institute for International Monetary
Affairs (coordinator)
Japan:
Daiwa
InstituteofResearch(coordinator)
China: Chinese Academy of Social Sciences(coordinator)
China: Wuhan University (coordinator)

Note: The Japan-ASEAN Financial Technical Assistance Fund (JAFTA) provided funding in
FY2003, and JAFTA and China provided funding in FY2004.
Sources: Ministry of Finance, ASEAN Secretariat(http://www.mof.go.jp/jouhou/kokkin/ASEAN+3research.htm,http://www.aseansec.org)

The participants of the ASEAN+3 Finance Ministers Meeting in August 2003 agreed to set up
the Research Group to “explore ways to further strengthen financial cooperation and promote
financial stability in the region.” The Research Group took the form of being commissioned by the
ASEAN Secretariat, and Japan provided financial assistance for this research activity. The results of
the research was reported at the first meeting of the Research Group held in Manila in April 2004,
where it was decided to conduct research on four themes in the following year. For the second-year
research activities, China, together with Japan, offered to provide financial assistance, a noteworthy
development indicating China’s proactive stance toward regional financial cooperation.
23

3. Prospects for an East Asian Monetary Zone and Roles of Japan, China, and South
Korea
3.1 Prerequisites and 3 Requirements for the Formation of a Regional Monetary Zone
Since the emergence of the common currency, the euro, in Europe at the end of the last century,the “common currency (single currency)” in East Asia as a long-term regional goal has become aconstant subject of comments by politicians, media articles and academic theses. A report by the
aforementioned ASEAN+3 Research Group does not entirely rule out an East Asian common
currency as a possibility in the distant future, but discusses steps toward the creation of a regional
currency system in East Asia, modeled on developments in Europe since the 1970s, as a more
realistic issue. “Not all but many papers…agree on that the growing closeness of the East Asian
economies will eventually make adjustments and stability of exchange rates in the region
necessary” (JCIF, 2004, page ii).

3.1.1 Prerequisites for the Formation of a Regional Monetary Zone
This section examines the European Monetary System (EMS), which functioned for a period of
20 years and paved the way for the birth of the euro in 1999, as an example of a regional monetaryzone. The EMS was the regional fixed exchange rate regime, under which the exchange rates ofcurrencies of participating countries were mutually fixed within a narrow band of fluctuations (of
2.25% either way before 1993) while they were allowed to fluctuate unrestrained against currencies
outside the region. The central rates of participating countries, determined against the value of theEuropean Currency Unit (ECU), a denominator, had to be adjusted over 10 times, and wereoccasionally exposed to currency speculation as in the 1992-1993 European currency crisis. The
EMS was far from a perfect monetary system, but had been sustained without resorting to externalfinancial support (from the IMF, for example), contributing to Europe’s economic integration by
maintaining currency stability.
Certain prerequisites are necessary if a regional currency system is to realize its objectives by
overcoming internal constraints as well as external shocks. They are the convertibility ofparticipating currencies, sound banking systems and financial and capital markets, and theexistence of a political consensus to maintain the regional currency regime.
(I) Currency Convertibility
Major European currencies restored their convertibility in current transactions by 1958, andwere traded freely on the foreign exchange market by the time the European Monetary System wasinaugurated in 1979. While many EC countries maintained some restrictions on capital transactions
until the end of the 1980s, an important factor behind the success of the EMS is the fact that the24currencies of participating countries were traded on the market freely against one another, and inparticular against the German mark as an intermediary currency, allowing the ECU, a basket ofcurrencies, to be synthesized easily on the market. In East Asia, currencies having convertibility inthis sense are limited to the Japanese yen, the Hong Kong dollar and the Singapore dollar (andprobably the Korean won in the near future), with capital transactions in most other Asiancurrencies being restricted.
(II) Sound Banking Systems, Financial and Capital Markets
Bank supervision in Europe is strict, and principal information regarding stability of thefinancial system was shared among the financial authorities of countries in the region or throughthe Bank for International Settlements (BIS) in Basel. Even under the EMS, large exchange rate
fluctuations or currency crises were not exceptional events in Europe. The fact that they did not
result in any financial crisis or economic crisis can be largely attributable to the sound banking
systems. Furthermore, currency market intervention to maintain the central rates of the participating
currencies proved effective only because of the existence of an efficient foreign exchange andfinancial markets with depth and breadth. The financial authorities of East Asian countries are now
addressing these issues, and their efforts are being complemented by the ASEAN+3 Finance
Ministers Meeting process and EMEAP.

(III) Political Consensus and Leadership
It is extremely important that political leaders share the political will to give priority toconcerted efforts to maintain a regional currency system over short-term gains for home countries.
The “Snake” (the joint float regime for EC currencies), the predecessor of the EMS, failed becauseof the lack of such political consensus, while the success of the EMS owed much to the unity ofContinental countries led by France and Germany. This unity was clearly demonstrated by the
French government when it decided in 1983 to stay within the EMS, abandoning its inflationary
growth policy and accepting the EC’s medium-term financial support and conditionality. In East
Asia, too, awareness of the importance of the political leadership is growing. However, “whether
the medium-term goal (of exchange rate stability within the region) will be realized…depend onwhether member countries have the will to make political compromises. It will likely beconsiderable time before such political leadership can be formed in East Asia” (IIMA, 2004, p. 15).

3.1.2 Three Requirements for a Regional Monetary Zone
The three basic requirements for a regional monetary cooperation system are a common
exchange rate system, a liquidity support mechanism or credit facilities, and multilateralsurveillance and policy dialogue. In the EMS, exchange rates of the participating currencies were25

fixed and adjusted through the Exchange Rate Mechanism (EMR). The EMR determined thecentral rates of the participating currencies in terms of the ECU, fixed the upper and lower limits ofthe fluctuation bands, and required central banks to conduct market intervention to maintain thecentral rates and fluctuation bands as appropriate. The credit system comprised of central banks’liquidity support and EC credit facilities. The former, designed to finance central bank intervention
on the currency market, consisted of the very short-term financing for unlimited amounts with noconditionality attached and the short-term monetary support for a period of three months, inprinciple, with subsequent consultations about the economic situation of a borrowing country. The
latter was the EC’s medium-term (two to five years) credit facility (the medium-term financial
assistance) for member countries with balance of payments difficulties, with borrowing countries
required to abide by economic policy conditions. The multilateral surveillance was conducted, in
effect, by the Council of Economic and Finance Ministers, the European Commission and theCommittee of Governors of the Central Banks.

(I) Common Exchange Rate Regime
In East Asia, an exchange rate arrangement, the core of any regional monetary system, remains
nothing more than an academic theme and has yet to become an item on the political agenda at theregional level. This is primarily because regional financial cooperation in East Asia started as acrisis prevention endeavor in the wake of the Asian currency crisis and was not designed as aneffort to stabilize exchange rates, which would require coordination of a complicated web ofnational interests. The situation is quite in contrast to Europe, which from the beginning attempted
to establish a common exchange rate regime because currency stability was essential for
maintaining the customs union and the common agricultural policy (CAP) of the European
Economic Community. In East Asia, as economic relations among the region’s countries growcloser, the issue of exchange rate adjustments is expected to go higher in the region’s list ofpolitical priorities going forward. At the third ASEM Finance Ministers Meeting held in Kobe inJanuary 2001, then Chinese Finance Minister Xiang Huaicheng said, “Collaboration on an
exchange rate regime is an advanced form of regional financial cooperation. We support theongoing and in-depth studies on regional monetary cooperation, drawing on European experiencesin this respect.”27(II) Liquidity Support Mechanism
The Chiang Mai Initiative (CMI) is important as the first concrete case of regional financial
cooperation. The CMI is now under review, and the outcome of the review is set to be reported to
the ASEAN+3 Finance Ministers Meeting in 2005. Items for consideration likely to be cited in thereview report include the following: (a) clarification of the ultimate objective of the CMI; (b) an
26

increase in the combined size of swap arrangements; (c) a mechanism for the simultaneous
activation of multilateral or bilateral swap arrangements and the ASEAN Swap Arrangement(ASA); (d) lessening or elimination of the link with IMF programs; and (e) a stronger institutionalarrangement for liquidity support, such as joint contributions of foreign exchange reserves (IIMA,
2004, p. 2). If a common exchange rate regime is put into place in East Asia in the future, it would
require a mechanism of credit facilities with diverse purposes and maturities.
(III) Multilateral Surveillance and Policy Dialogue
The economic review and policy dialogue (ERPD) in the ASEAN+3 Finance Ministers Meeting
framework remains an informal process and “has not yet been as effective as it should be.” Themultilateral surveillance process, which goes beyond a simple exchange of information andcomprises the monitoring of macroeconomic indicators of the countries concerned, policy dialogue
and peer pressure, will have difficulty in functioning with practical effects unless its objective ismade amply clear. In order to sever the CMI from IMF programs, it is deemed essential for East
Asia to have a credible and independent surveillance function. However, many countries in theregion are less than enthusiastic about embracing the cumbersome surveillance that would constrain
their domestic macroeconomic policies and structural reform policies. Moreover, as long as
countries in the region separately maintain their floating exchange rate systems, the risk of currency
speculation is relatively small and there is little likelihood that these countries will have to mobilize
the network of swap arrangements under the CMI. In the future, if they need to adjust exchange
rates at the regional level under the common exchange rate system, multilateral surveillance will beof significant importance and the CMI or other liquidity support mechanisms need to be drasticallystrengthened. Also important is the network of information exchanges among central banks in theregion, including EMEAP.

3.2 Roles of Japan, China and South Korea in the Formation of a Regional Monetary Zone
3.2.1 Japan
After China and ASEAN concluded the “Framework Agreement on Comprehensive Economic
Cooperation” in November 2002 and Japan and ASEAN agreed on the “Framework forComprehensive Economic Partnership” in November 2003,28 a number of free trade agreements
were concluded or are under negotiations in East Asia. These developments in trade, investment,
services and other aspects of the real economy should increase the extent of interdependence within
the regional economies and encourage moves in the future toward the establishment of a regionalmonetary zone.
“The ASEAN+3 countries may have an incentive to expand the CMI in parallel withnegotiations on the establishment of a free trade area in the region. In reality, however, free trade27

discussions appear to be eroding the willingness of many East Asian countries to get involved in the
CMI negotiations” (Park & Wang, 2004, p. 9). If this view is correct, the only way to make thisimportant form of financial cooperation successful would be for Japan, as an originator of the CMI,
to exert even greater leadership. Regional cooperation in the financial field has just got off theground in recent years, mainly through the ASEAN+3 framework and EMEAP. When envisioning
the establishment of a regional monetary system not only for preventing and dealing with acurrency crisis but for ensuring the stability of currencies within the region, regional financial
cooperation in its current form is only at the beginning of the long road ahead.
The establishment of the regional monetary system would require the three elements ofarrangement for exchange rate adjustments, the credit facility, and multilateral surveillance. The
first element has yet to be put on the regional political agenda, and the second and third elements
have yet to be firmly put into practice in the region. The responsibility of Japan is to push forwardwith this long-term project by coordinating the diverse interests of the region’s countries. At thesame time, it is obvious that Japan cannot lead the entire East Asia single-handedly. Japan should
exert its leadership in collaboration with other major countries in the region, particularly China. As
seen in its first financial contribution to the ASEAN+3 Research Group in 2004, China has turned
positive toward regional financial cooperation.29 Japan and China together must act as the driving
force toward realizing a regional monetary zone in East Asia.
Japan’s status as leader of East Asia has been visibly undermined since the 1990s. The rise of
China and its growingly closer relations with the ASEAN countries certainly had some impact, but
the decline of Japan is primarily attributable to its own problems that greatly disappointed
neighboring countries as well as the entire world. Japan’s long economic stagnation andnon-performing loan problems at major Japanese banks appear to have peaked out in 2003, but
careful economic management is still needed to put sustained economic growth on a secure footing.
Domestic groups with vested interests in agricultural and other sectors are continuing to stand in
the way of Japan’s free trade negotiations. Despite the longstanding call for the internationalizationof the yen, progress toward that goal is at a snail’s pace.30 All these problems will affect Japan’s
restoring of international confidence in its leadership in the region.

3.2.2 China
In recent years, China’s international influence has been growing remarkably in East Asia as
well as on the global scene. The growing influence is backed by the high economic growth under
its reform and opening policy in the last two decades as well as by expectations of its continued
growth going forward. Needless to say, China’s economic advancement and the resulting rise in theliving standard of Chinese people are welcome developments. They will also contribute to making
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regional economic relations come closer through free trade agreements and regional financial
cooperation.
In the area of regional financial cooperation, China began to make proactive efforts towardbuilding a regional financial architecture in East Asia. Together with Singapore, China co-chairs theworking group on the review of the Chiang Mai Initiative. The outcome of the review is a matter ofgreat interest because it should indicate whether China, as the co-chair of the working group, iswilling to pave the way for an Asian Monetary Fund (AMF), an idea that it once refused to support
in the past. As part of the Asian Bond Markets Initiative, China is now considering allowing thedomestic placement of yuan-denominated bonds by the Asian Development Bank andgovernmental financial institutions of other countries.31
For China to become the driving force, along with Japan, for the realization of the regionalmonetary system over the long term, one import condition must be satisfied: the Chinese yuan musthave complete convertibility and also become an international currency. The yuan’s convertibility
in both current and capital transactions is important at least in two ways. First, it signifies China’s
full integration into the world economy. Also, a regional currency system is built around a strong
international currency, whether it is a basket of currencies like the ECU or an anchor currency likethe German mark. If the Japanese yen remains virtually the only international currency in East Asia
in the future, with the Chinese yuan’s convertibility constrained to the same extent as at present,
China is unlikely to cooperate in the building of the regional monetary system where a central roleis denied to the yuan.32
Though the Chinese government has declared the yuan’s full convertibility as its long-term goal,
when that goal will be realized remains unclear. Dai Xianglong, then Governor of the People’s
Bank of China, once said in a speech made in Hong Kong, “Liberalization of capital accounttransactions and the yuan’s convertibility would require an overall national strength, a stablefinancial system and the government’s strong capability of macroeconomic control. At the moment,
China cannot meet these requirements. Therefore, China will gradually address the liberalization ofcapital transactions and the realization of the yuan’s convertibility in due order. We should not rush
things. After China’s accession to the WTO (World Trade Organization), however, the liberalizationof capital account transactions and the yuan’s convertibility should be facilitated as the Chinese
capital market develops and trade and foreign direct investment in China expand” (the Economic
Daily, February 21, 2002).
If China is to realize the yuan’s convertibility and take the initiative in regional financial
cooperation, it should redouble efforts to put its financial institutions on sound footing, establish astable financial system, reform its foreign exchange, financial and capital markets and further
develop macroeconomic policy tools. In other words, key to China’s exerting its leadership in East
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Asia is its successful transition from a planned economy to a genuine market economy.

3.2.3 South Korea
South Korea may be described as occupying a unique position in East Asia. First, South Korea
took its place among advanced industrial nations by joining the Organization for Economic
Cooperation and Development (OECD) in December 1996. 33 Second, it was able to restore
economic health in a remarkably short period of time after suffering heavily from the Asian crisis.
Through these experiences, South Korea is in a position to provide a lot of case examples to othercountries in the region, including the process of industrialization, restructuring of its economy andfinancial system after the Asian crisis, and the process of liberalization of capital transactions that
effectively made the Korean won a convertible currency. As a middle-size developed economy,South Korea can make its unique contribution to the convergence at a high level of the region’s
economies at varying stages of development.
In promoting monetary and financial cooperation in East Asia going forward, South Korea may
be expected to play a role similar to that of the Benelux countries in Europe. While Europe’s
integration was led by France and Germany, the Benelux countries, the founding members of theEuropean Economic Community (EEC), supported the trend toward integration and served as alubricant in the coordination of varied interests of smaller member states. South Korea is in aposition to complement the leadership of Japan and China in a constructive manner toward theformation of a regional currency system, while representing the interests of smaller countries as the
middle-size developed economy in the region.

4. Focus of Regional Financial Cooperation Should Shift from Crisis Prevention to theCreation of a Regional Monetary System
In order to prevent a recurrence of the Asian crisis, the direct and indirect causes of the crisisand their backgrounds should first be examined and measures to correct them should be taken
accordingly. The following can be cited as the direct causes of the Asian currency crisis: (a) rigid
exchange rate systems; (b) problems with influx and outflow of short-term capital; (c) inadequate
statistical data on external transactions; and (d) liquidity shortages. The indirect, structural causes
include (e) vulnerable financial systems, and (f) underdeveloped domestic bond markets and thedual mismatch problem. Additionally, (g) the lack of a regional mechanism for liquidity support canbe cited as the international background of the crisis.

30

Table 6. Causes of the Asian Crisis and Ongoing Regional Financial Cooperation
Current State of Regional Financial
Cooperation in East Asia

Direct, Indirect Causes of the Asian Crisis(a) Rigid exchange rate systems

Still at the stage of academic discussion(b) Problems with influx and outflow of

Monitoring of capital flows (ASEAN+3)

short-term capital(c) Inadequate statistical data on externalTechnical support for capacity-building fortransactions

compilationofreliablestatistical

data(ASEAN+3)(d) Liquidity shortages

Managed by individual countries, such as
boosting exchange reserves(e) Vulnerable financial systems

Research and technical assistance for facilitating
financial stability (ASEAN+3)(f) Underdeveloped domestic bond markets andABMI (ASEAN+3) and ABF (EMEAP)

the dual mismatch problem
(g)

Lack

of

regional

liquidity

supportChiang Mai Initiative (ASEAN+3)

mechanism

The Asian crisis helped awaken a sense of regional unity in East Asia and served as the major
catalyst for regional cooperation in such forms as free trade agreements and financial cooperation.
Financial cooperation is taking concrete shape through the framework of the ASEAN+3 Finance
Ministers Meeting and through central bank cooperation at EMEAP. Specifically, the ongoing
financial cooperation includes the Chiang Mai Initiative, surveillance and policy dialogue (ERPD),
development of the Asian bond markets (ABMI and ABF), and research and training programs.
These developments, in some way or other, respond to (b) through (g) mentioned above.
Going forward, as the economies in the region become closer with the spread of free trade
agreements and other developments, the need for a common exchange rate system for currency
stability is expected to grow. Accordingly, the focus of regional financial cooperation should beshifted from the prevention of a recurrence of the crisis as at present to the creation of the regionalmonetary system. The formation of the EMS-style regional currency system requires as
prerequisites (a) realization of the convertibility of major regional currencies; (b) sound financial
systems and financial and capital markets; and (c) strong political leadership. The threefundamental components of the regional monetary system are (d) the common exchange rate
system; (e) the liquidity support mechanism; and (f) the multilateral surveillance process.
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Japan and China are expected to serve as the driving force for financial cooperation in East Asia.
In order to exert their leadership in this regard, Japan must restore international confidence in its
macroeconomic management capability and China should realize the Chinese yuan’s convertibility.
Both countries must overcome stacks of domestic economic problems. South Korea, meanwhile, is
expected to contribute to the convergence of the economies in the region by sharing information on
its recent successful experiences with the ASEAN countries and also complement the leadership ofJapan and China in a constructive manner.

1“The main motivation (for strengthened economic cooperation in Asia) stems from the Asianfinancial crisis” (Montiel, 2004, p. 2).
2 Barry Bosworth, “The Asian financial crisis: what happened and what we can learn from it”(http://www.brookings.edu/press/review/summer98/bosworth). The term insolvency wastranslated into Japanese words meaning the inability to make payments, but insolvency in effectis a bankruptcy or business failure.
3 The ASEAN Swap Arrangement (ASA) was launched in 1977, with each participating country
contributing $40 million (for a total of $200 million). Between 1979 and 1992, four countries
made use of the arrangement for a total of five times. At the time of the Asian currency crisis,
however, the facility proved ineffective as it was too small in scale to provide liquidity support tocountries in trouble (Park & Wang, 2004, p.15).
4 The conventional idea in international finance theory that of three policy objectives, only two
may be achieved but the third one has to be abandoned.
5 Care should be exercised in the distinction between medium- and long-term debt and short-term
debt. Even for medium- and long-term loans due in over one year, loan contracts usually haveclauses that enumerate conditions requiring borrowers to make repayments immediately without
the benefit of term including a default clause. Thus, it is quite possible that medium- andlong-term debt would turn into short-term debt all at once.
6 “But the crisis in (South) Korea, which started after the AMF (Asian Monetary Fund) proposal
was rejected by the Americans and which was primarily a liquidity crisis, not a solvency crisis,
might have been avoided” (Dieter & Higgott, 2002, p. 10).
7 “Indeed, some countries have seen sufficient value in having a government debt market that they
have taken steps to create one even though the government had no need to borrow (e.g., Hong
Kong, Singapore).” (“Regional Financial Arrangements: Recent Developments,” a report byReserve Bank of Australia Deputy Governor Glenn Stevens at the APEC Business Forum of the
Asia-Pacific Economic Cooperation (APEC) forum, held in Sydney on April 15, 2004.)
8 From a summary of a joint statement of an emergency monetary meeting held in Tokyo on June
20, 1998. “China’s repeated firm commitment to maintaining the Chinese yuan’s stability
welcomed” (Sakakibara, 2000, p. 244).
9 In November 1999, China and the United States agreed on basic conditions for China’s accession
to the WTO.
10 http://www.mofa.go.jp/region/asia-paci/asean/pmv9911
11 The central banks and monetary authorities of Australia, China, Hong Kong, Indonesia, Japan,
South Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand.
12 The ABAC-organized “Bond Market Conference to Strengthen the APEC Region's Financial
Systems” was held in Taipei in May 2004.
13 Vice Minister of Finance for International Affairs Eisuke Sakakibara, who took part in the MFG
negotiations for Japan, says, “Media carried a photo showing I was shaking hands with U.S.
Deputy Treasury Secretary Summers and IMF Deputy Managing Director Fisher, but thathandshake was not really a pleasant one for me” (Sakakibara 2000, p. 190).
14 The participants were foreign ministers from Bahrain, Bangladesh, Brunei, Cambodia, China,
32

India, Indonesia, Japan, South Korea, Laos, Malaysia, Pakistan, the Philippines, Qatar, Singapore,
Thailand and Vietnam.
15 In addition, as part of the New Miyazawa Plan, Japan concluded bilateral swap arrangementswith South Korea and Malaysia, for $5 billion and $2.5 billion, respectively.
16 As long as participating countries maintain the floating exchange rate system (managed or
independent), the likelihood of a currency crisis is limited, presumably weakening therecognition of the necessity for liquidity support-linked surveillance.
17 Information in this sector primarily draws on the website of the Ministry of Finance.
18 Japan Bank for International Cooperation is consulting with the Chinese and Thai governments
on issuance of Chinese yuan- and Thai baht-denominated bonds (the Nihon Keizai Shimbun,
September 30, 2004).
19 Under the cooperation of the South Korean and Japanese financial authorities, a plan is under
way to securitize yen-denominated loan claims on South Korean small businesses and issue
yen-denominated collateralized debt obligations in Asia other than South Korea (the Ministry of
Finance’s press release dated June 23, 2004). The plan materialized in December 2004 (website
of Japan Bank for International Cooperation).
20 The Asia Development Bank is planning to issue a baht-denominated bond in Thailand (Asahi
Shimbun, May 15, 2004). The ADB is also considering the placement of a yuan-denominatedbond in China.
21 A local subsidiary in Thailand of Isuzu Motors Ltd. issued a baht-denominated bond in Thailand,with debt guarantee provided by Japan Bank for International Cooperation (a company press
release dated June 21, 2004). A plan is also under consideration for the issuance of local
currency-denominated bonds in Asia, making use of Nippon Export and Investment Insurance(Nihon Keizai Shimbun, April 8 and May 8, 2004).
22 The Asian Development Bank, South Korea and Thailand led discussions at the WG on Credit
Guarantee and Investment Mechanism, and the WG submitted an interim report in November
2004.
23 At the WG on Rating Systems and Dissemination of Information, the Asian Development Bank,Japan, China and South Korea as well as local rating agencies of Indonesia, Thailand, thePhilippines and Malaysia held seminars, and the WG submitted an interim report in November
2004.
24 On May 15, 2004, the AsianBondsOnline website (ABW) was launched. The ABW publicizes
information on bond markets in the region and on progress being made by the ABMI working
groups (see http://www.asianbondsonline.adb.org).
25 The Asian Development Bank and Malaysia’s central bank are leading the research for specificsteps.
26 “EMEAP Central Banks Announce the Initial Structure of the Asian Bond Fund 2,” dated April
15, 2004. See the following website for the structure of the ABF2.
http://www.boj.or.jp/intl/04/eme0404a.htm
27 http://www.mof.go.jp/english/asem/aseme03e.htm
28 On September 4, 2004, Japan and ASEAN agreed to launch negotiations on comprehensive
economic partnership in April 2005 and conclude the negotiations within two years.
29 According to informed sources, this may be the first case of China’s financial contribution
within the ASEAN+3 framework. Vice Governor Su Ning of the People’s Bank of China citedthe following areas as China’s priorities in regional financial cooperation: (a) strengthening of
the function of the Executives’ Meeting of East Asia and Pacific Central Banks (EMEAP); (b)strengthening of the CMI; (c) building a financial supervision system based on central bankcooperation; (d) cooperation in stabilizing exchange rates among regional currencies; and (e)development of an East Asian bond market (Nihon Keizai Shimbun, June 1, 2004).
30 “The yen needs to play a bigger role in regional transactions. However, it is too costly to use theyen in international transactions at present…The initiative (to rectify this costliness) needs to betaken by the Japanese Ministry of Finance and Japanese banks operating in the region”(Sussangkarn & Vichyanond, 2004, p. 40).
31 “China Lifts Ban on Yuan-Denominated Bonds by Foreign Firms,” the Nihon Keizai Shimbun,
September 9, 2004.
32 “China may feel it unbearable to play a role next to Japan in regional organizations in East Asia.
33

This concern would prove to be the biggest impediment to the future development of the CMI”
(Park & Wang, 2004, p. 12).
33 While the United Nations classifies South Korea as a developing economy, the IMF counts it as
one of the advanced economies (The Economist, January 17, 2004).
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