MONETARY AND ECONOMIC STUDIES (SPECIAL2002
OpeningEDITION)/DECEMBER
Speech by Masaru Hayami

Opening Speechby Masaru Hayami,Governor of the Bank of Japan

It is my great pleasure today to address the 10th international conference hosted by
the Institute for Monetary and Economic Studies. On behalf of all my colleagues
here at the Bank of Japan, I welcome all the participants. And my special thanks to
the institute’s two advisors, Professor Allan Meltzer and Professor Maurice Obstfeld.
You have done a wonderful job helping us organize the conference.
This is the first conference in the 21st century, and for such an occasion mycolleagues chose “Exchange Rate Regimes in the 21st Century” as the theme.
Exchange rate regimes among major countries experienced several changes afterWorld War II while fulfilling their expected role of enhancing cross-border tradeand investment as well as encouraging world economic growth and preserving
price stability.
Being a central banker, I was also involved in changes in exchange rate regimes. On
Sunday, August 15, 1971, when U.S. President Nixon announced that the UnitedStates would no longer convert the dollar into gold, I was stationed in the London
office of the Bank of Japan. And I still vividly remember that on the following day,Monday, with Bundesbank Vice-President Emminger, I took part in a confidential
meeting with U.S. Treasury Undersecretary Volcker. He had flown over to London toexplain to the European monetary authorities the president’s announcement.
Most of the major countries, except Japan, closed their foreign exchange markets
after the announcement. European participants, who broke the ice at the meeting,said that they could not re-open their markets until the United States decided thenew parity of the dollar. For monetary authorities at that time, the adoption offloating exchange rates was not like the dawn of a new era with full confidence.
The then BIS President Zijlstra termed the trial and error among authorities under
the floating exchange rate regime “a voyage through uncharted waters,” and that was
how all the monetary authorities felt.
Some 30 years have passed under the floating regime and now we have twochallenges for the regime to meet.
First, we have to work out how to preserve foreign exchange rate stability between
major currencies. The dollar has functioned as a key currency under the floatingexchange rate regime. Its exchange rate on other major currencies, however, has byno means been stable.
I have had a hard time, sometimes as a central banker, and sometimes as the headof a trading company, dealing with fluctuations in foreign exchange rates.

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In the meantime, European Union countries made efforts to stabilize foreignexchange rates between member countries and such efforts paid off at the end of the20th century. They gave birth to a single currency, the euro.
The euro will no doubt contribute to enhancing trade and investment within theregion and will be a model for other regions in the world. And it will take some timeto get clues to what extent the euro will play the role of a key currency and lead tothe stability of foreign exchange rates between major currencies.
I should also add that we might need to review the background history andrationale behind the special drawing rights (SDR) of the International Monetary
Fund which were created in 1969.
The other important challenge in the 21st century is how we can devise theexchange rate regime in order to stave off currency and financial crises in theemerging economies and also how to contain resultant contagion to the minimum.
We understand that the past currency crises in Latin American and Asian
countries were brought about by individual and unique factors. Still, we have nochoice but to make steady efforts to learn from the past crises in various countries
in order to ward off currency crises and contain contagion. I am told that thisconference will take up such issues related to currency crises and I am convincedthat your discussions will provide a good opportunity to enhance our understanding.
A better understanding of an ideal exchange rate regime may not lead to auniversal currency system all the countries around the globe accept. I have several
times witnessed a currency system, once optimal for a certain country at a certain
time, gradually become fraught with inconsistencies and unstable in time.
Yet, pessimism is not what I want to spread. A series of inconsistencies in theinternational currency have, in my judgement, deepened our understanding of thefunctions and roles of an exchange rate regime and have encouraged the evolution ofsuch a system. To rack our brains and map out ways to achieve a better exchange rate
regime is one of the most important challenges for central bankers.
I am convinced that with the experts from all over the world exchanging theirexperiences and views, this conference will contribute to meeting such a challenge.
And I believe this conference will also provide clues to how to map out charts
through troubled waters.
Thank you for your attention.

10 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/DECEMBER 2002