Kiyohiko G Nishimura: Future of central bank cooperation in Asia, Latin
America and Caribbean States
Remarks by Mr Kiyohiko G Nishimura, Deputy Governor of the Bank of Japan, at the
BOJ-CEMLA Seminar on Regional Financial Cooperation, Tokyo, 11 October 2012.
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1. Introduction: central bank cooperation in Asia
Good morning, honorable speakers and distinguished guests. Welcome to the Annual
Meetings of the IMF/World Bank Group, and in particular, to this BOJ/CEMLA seminar on
regional financial cooperation, which is one of the most relevant and pressing issues in our
increasingly inter-connected world. Today, in my remarks, I would first like to touch upon the
history of cooperation among central banks in Asia, followed by an assessment of what has
been achieved since the Asian Currency Crisis of the late 1990s, and how this helped Asia
weather the shocks of the current global financial crisis. Then I will discuss the issues we
face today in this post-crisis world.
The Bank for International Settlement, the BIS, is the first name that comes to mind when
considering cooperation among central banks. The BIS provides opportunities for major
central banks to discuss various issues, including international banking standards and global
financial stability.1 However, most Asian central banks had to wait until the latter half of the
1990s to become directly involved in BIS activities.
It was this circumstance that led the Bank of Japan to propose the establishment of the
Executives' Meetings of East Asia and Pacific Central Banks, or the EMEAP, which was
officially established in 1991 with the members of eleven economies of East Asia and
Oceania.2 The EMEAP plays a particularly important role in promoting the exchange of
opinions among practitioners and the maintenance of a surveillance network. Member central
banks share information at the working group meetings which cover financial markets,
banking supervision, payment and settlement systems, and information technology. To take
a prominent example, the Working Group on Payment and Settlement Systems (WG/PSS)
regularly updates its "Red Book", using methods similar to those adopted by the BIS, to
explain details of the payment and settlement systems of the member economies. Currently,
the Working Group on Financial Markets (WG/FM) is closely monitoring the impact of the
European sovereign debt crisis upon financial markets in Asia and Oceania.
2. Two financial crises and Asian financial markets
In the past two decades, member economies of the EMEAP have experienced two financial
crises: the Asian Currency Crisis of the late 1990s, and the current global financial crisis.
However, the impact of these crises was very different: severe in the former, and relatively
mild in the latter. I believe the difference is partly due to the enhanced cooperation among
the central banks of the EMEAP member economies.
The Asian currency crisis highlighted the structural vulnerabilities in the region's economies:
first, there was the double-mismatch of currency and maturity in the region's financial sector,
and second, corporate finance remained highly dependent on banks. As a result, Asian
countries were vulnerable to sudden changes in global financial markets and their abundant
savings were not being mobilized effectively within the region.
To rectify the problem of overdependence on banks, the EMEAP started the Asian Bond
Fund (ABF) initiative to promote local-currency bond markets, a project giving members the
opportunity to invest in bonds in Asia. In parallel, the governments of ASEAN+3 member
countries are now implementing the Asian Bond Market Initiative (ABMI) to foster
deregulation and to create an environment conducive to investment. The results have been
impressive: the local-currency bond markets in Asia have developed significantly, as shown
in Figure 1, in terms of amount outstanding for both government and corporate bonds. The
share of Asian-currency bonds in global bond markets increased from 2.1% at the end of
1996 to 8.4% at the end of 2011. What is remarkable here is that the presence of foreign
investors in a number of local-currency bond markets in Asia is rapidly increasing, as shown
in Figure 2. This can be attributed to the enhancement of the market infrastructure of these
economies, not just because of improvements in the risk/return profile of these bonds in
terms of the creditworthiness of the issuers and the relatively higher yields of the papers.
Moreover, there has also been a significant improvement in the problem of currency
mismatch. The share of foreign lenders' loans denominated in local currencies has increased
remarkably, as shown in Figure 3, although the maturities of such loans are still one year or
shorter. It is worth mentioning here that some countries have implemented measures
explicitly to reduce the mismatch. A case in point is the Republic of Korea which obliges local
banks to hold a certain proportion of short-term foreign currency assets against short-term
foreign currency debt.
The Asian economies have weathered a series of shocks starting from the bankruptcy of
Lehman Brothers to the European debt crisis of today. I believe the improved market
structure described above has contributed to this performance, together with good economic
fundamentals and the relatively plain business models of banks in Asia.
3. Challenges for the future - beyond the boundary of Asia
The financial market developments described so far pose new challenges for central bankers
in Asia. I believe these challenges are also relevant for our colleagues in Latin America and
Caribbean states.
The first challenge is how to cope with cross-border capital flows. Given that the bond
markets have developed and that the proportion of non-resident holders has increased, there
have been calls for categorical restrictions on cross-border capital flows to prevent the
sudden reversal of portfolio flows that could cause a financial crisis. This problem may be
particularly keen when the growth of the bond markets is so rapid that the market
infrastructure fails to keep pace. In fact, there is some evidence suggesting a positive
correlation between the ratio of non-residential holders and the volatility of bond yields.3
However, we need careful benefit-cost analysis here since such restrictions may impose
substantial efficiency loss on the country in the long run. What is essential is to strengthen
market infrastructure: for the bond issuer to maintain sound creditworthiness, and for the
market to increase its transparency. In fact, in Germany, the share of non-resident holders of
government bonds reaches almost sixty percent, yet this is not seen as any cause for
concern.
The second challenge is to improve the resilience of financial markets against financial
stress, and here collateralized markets are the key. While the bond markets show
remarkable growth in Asia, the collateralized money markets, including the repo markets, are
underdeveloped, except in Japan. In most of the emerging market economies, repo
transactions are largely used for the monetary policy operations of the central bank, while
they are rather rarely used between private market participants. Legal uncertainty regarding
the effectiveness of collateral has often been pointed to as the main reason for this scarcity
of private repo transactions. However, in order to maintain the functioning of the money
market, especially under very stressful conditions, it is essential to have well-functioning
markets for collateralized transactions, including repos.
The third challenge is cross-border financial regulations. In particular, this is the issue of how
Asia, Latin America, and Caribbean states should respond to the latest regulatory
developments in the United States and Europe. There have been moves to extend U.S. and
European regulations beyond their domestic borders to be applied in other jurisdictions,
based on the argument of guaranteeing a "level playing field". A level playing field is
undoubtedly important for fairness. Nonetheless, what we really need is a playing field that
leads to fair competition among financial institutions of different types and backgrounds. The
regional and functional heterogeneity of Asia, Latin America, and Caribbean states should be
honored in the appropriate way. However, I am also aware of the danger of "spaghetti
regulations" once each and every country starts insisting on its own unique regulations,
where we end up with extremely complicated and entangled regulations with unintended
cross-border consequences. As such, we need to formulate a "regional voice" to make sure
that the global regulatory framework is clear and consistent.
Last but not least, given the mutual linkages among the regions of Asia, Latin America and
Caribbean countries, it is all the more important to monitor whether there are any financial
imbalances in any countries. To achieve this goal, we need to improve not only the credibility
and the accuracy of our economic data, but also their timeliness. Central banks should play a
major role in such regional surveillance work and economic data improvement.
To conclude, I believe candid discussion and collaboration on nuts and bolts issues among
central bank experts are truly important in the context of central bank cooperation. I hope the
rewards of our endeavors will be the formulation of fruitful new ideas and the expansion of
rewarding human networks.
Thank you for your attention.

BIS central bankers' speeches