Toshihiko Fukui: Growth, integration and monetary policy in East Asia
Opening speech by Mr Toshihiko Fukui, Governor of the Bank of Japan, at the 14th International
Conference hosted by the Institute for Monetary and Economic Studies, Bank of Japan, Tokyo,
30 May 2007.
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I. Introduction
Good morning, ladies and gentlemen. It is my great honor to address the 14th international conference
hosted by the Institute for Monetary and Economic Studies. On behalf of my colleagues at the Bank of
Japan, I welcome all the distinguished guests from central banks, international organizations, and
academia. The theme of this year's conference is "Growth, Integration and Monetary Policy in East
Asia."
II. East Asia's growing integration into the global economy
Over the past decades, East Asia has been one of the most rapidly growing regions in the world
economy. Although the region suffered from a temporary setback owing to the financial crisis of the
late 1990s, it has exhibited an impressive economic recovery. The average annual growth rate of East
Asian emerging economies since 2000 reached 7 percent, substantially exceeding that of
industrialized economies. Since the crisis, there has been a considerable improvement in economic
fundamentals in the region. Large stocks of foreign exchange reserves have accumulated, balance
sheets of both the corporate and banking sectors have improved, and structural reforms in various
areas have proceeded, all of which have contributed to making East Asia more resilient to external
shocks. It is highly likely that East Asia will continue to play a major part in the sustained growth of the
world economy.
East Asia's high growth has been accompanied by its deepening economic integration with the world.
The integration is taking place at both the inter-regional and intra-regional levels. It is reported that
Asia's share of world trade more than doubled during the past three decades. Intra-regional trade in
East Asia also increased considerably. The share of East Asia's intra-regional trade is comparable
with the NAFTA, although it is slightly lower than that of the EU. The increasing trade is a reflection of
developments in the supply chain wherein each country specializes in the optimal parts of the global
production network based on its resource endowment and comparative advantages.
Meanwhile, it is notable that the rapid emergence of China is adding further momentum to the growth
dynamism of the world economy in various ways. First, China's buoyant domestic demand provides
more business opportunities for the rest of the world. China's role in the world economy has gone
beyond a mere production base. It is increasingly a source of final demand as well. Second, China's
integration into the global economy is promoting transformation of trade, investment, and production
patterns of other economies. Previously, China maintained its comparative advantages mainly in
production of goods and services that were intensive in the use of unskilled labor. In recent years,
however, it has attracted sizable foreign direct investment from developed countries and thereby
strengthened its competitiveness in production of capital-intensive or knowledge-intensive goods and
services. Such changes on the part of China have affected comparative advantages of other East
Asian economies as well and required them to reallocate domestic resources accordingly.
The efficient reallocation of resources could, in principle, lead to higher growth of the region as a
whole. At the same time, however, the adjustment process sometimes entails certain costs. If
domestic markets and institutions are not flexible enough to facilitate reallocation of labor and financial
resources from unproductive sectors to productive sectors smoothly, the cost might appear in the form
of stagnant growth and unemployment. In this regard, it is of utmost importance for policymakers to
continuously pursue reforms to ensure that their domestic systems remain responsive to structural
changes in the economy.
On the financial front, East Asia's integration with the international financial system has also advanced
steadily in recent years. The integration brings benefits to the economies in the region. With more
funding options available, borrowers in the region can raise funds on more favorable terms. With more
global investment options available, investors can improve the risk profile of their portfolio through
diversification. However, as financial integration deepens and international capital flows become more
active, negative shocks originating from one country or region are easily transmitted to another country
or region. Such transmission of shocks is not only from developed economies to emerging economies,
but also vice versa. Asset prices, in particular, stock prices, are closely correlated both globally and
regionally. It should be noted that, in such circumstances, asset prices tend to overshoot economic
fundamentals from time to time, causing excessive volatility, which could in turn negatively affect the
developments in the real economy.
III. Issues for discussion at the conference
Whereas East Asia's integration could bring substantial benefits to both the global and regional
economies, possible side effects should be monitored carefully. It will be a challenge to reap maximum
benefits from deepening economic and financial integration while minimizing costs that could possibly
arise from such integration. Keeping these broad viewpoints in mind, let me raise several questions
that I hope are discussed at the conference.
First, what are the implications of East Asia's growing economic and financial integration on the global
business cycle and price movements? The mechanisms through which integration affects various
economic variables are complicated. Among these, the relationship between global economic
integration and the inflation process is of particular interest to central bankers. Integration of emerging
economies including East Asian economies appears to have exerted downward pressure on wages
and prices through intensified competition among firms. Whether this trend will continue into the future
will have important bearings on the conduct of monetary policy.
Second, what issues are raised for central banks of industrialized economies and East Asian emerging
economies by growing external imbalances? It has been argued that global economic and financial
integration has contributed to making large current account imbalances more sustainable. East Asia
has been a beneficiary of a substantial amount of private capital flows from developed economies, and
at the same time, an exporter of an even greater amount of capital in the form of foreign reserves. This
is not consistent with the prediction of traditional economic theory that capital flows from developed
economies to emerging economies where the marginal productivity of capital is higher. A question
naturally arises as to whether the phenomenon has been driven by the fundamental misallocation of
global savings and investment. In any case, disorderly unwinding of the imbalances and
accompanying capital flows would have detrimental impacts on global financial stability. It is critical for
us to carefully examine the factors underlying the imbalances and the desirable policy for both surplus
and deficit economies.
Third, what kind of monetary and exchange rate regimes are appropriate for East Asian emerging
economies to pursue sustained economic growth under price stability? In the world of highly open
capital accounts, the effectiveness of monetary policy depends on the exchange rate regimes in place.
After the crisis, there has been a tendency in emerging economies to abandon exchange rates as a
nominal anchor. As a matter of fact, a growing number of economies have moved away from pegged
exchange rate regimes toward relatively more flexible exchange rate regimes. So far, it seems that the
benign international market environment for emerging economies in recent years has made such a
transition more or less smooth. Nevertheless, the extent to which exchange rate fluctuation should be
tolerated remains a challenging question. Looking ahead, the appropriate policy regimes could change
over time. It is important for central banks to review the appropriateness of the policy regimes in light
of the changes in their economic and financial structure and the state of the international financial
system.
IV. Conclusion
To conclude, East Asia has been in the process of dynamic transformation. We are still a long way
from fully understanding the policy implications of East Asia's integration into the global economy. I am
looking forward to learning from both prominent scholars and central bankers their analyses and
perspectives on the issues. I would be delighted if all of you could take away some insights from the
discussion.
Thank you for your attention.