Mr Hayami: Globalization and regional cooperation in Asia
Speech given by Mr Masaru Hayami, Governor of the Bank of Japan, at the Asian Pacific Bankers
Club, in Tokyo, on 17 March 2000.
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It is a great honor to be invited today and given an opportunity to address distinguished members of
the Asian Pacific Bankers Club. In particular, I would like to commend the Club for providing a
valuable forum for fostering mutual understanding among representatives of major banks in East Asia
and the Pacific region. More than two years have passed since the outset of the currency crisis in Asia,
and we can now say that we have clearly witnessed a recovery. Thus, at this juncture, I believe it
useful to examine what kind of regional cooperation is desirable in Asia from a long-term perspective.
Positive and negative sides of globalization
Let me first consider globalization. The essence of globalization is the integration of markets
worldwide and the deepening of various interdependent relations. As we all know, the speed of
globalization has been accelerating, especially in financial markets. This is clearly evidenced by the
significant increase in foreign exchange transactions and international bond issues over the span of the
past ten years. You will all agree that the rapid progress of information and communication technology
has played a decisive role as the driving force behind globalization.
But, we should not forget the dynamic mechanism whereby globalization creates pressures for the
harmonization of such systems as accounting, taxation and corporate governance across borders,
which, in turn, leads to further globalization. As is commonly said, "globalization begets
globalization". Thus, the move toward globalization is an inevitable reality, and not likely to be
reversed.
Bearing in mind such a reality, we need to examine the problems related to globalization and how we
should respond to them. Globalization has brought about a variety of changes. One obvious benefit
from a long-term viewpoint is that active cross-border capital flows will realize the efficient allocation
of world resources.
At the same time, precisely because of enhanced efficiency, there is a greater risk that the rapid
increase in international capital flows will induce an unexpected adverse impact, as was the case when
financial crisis contagion following the outbreak of the Asian financial crisis in 1997 spread to Russia
and Latin America.
Given the fact of life that globalization is not reversible, what we need to do is to minimize the
negative side of globalization. In fact, since the financial crisis in Asia, various measures have been
effected to prevent international contagion stemming from financial crises and to improve the
international financial system. These measures include the improvement of disclosure to achieve
enhanced market discipline, the establishment of a domestic financial system which is robust and
resilient to external shocks, closer international cooperation in terms of financial supervision, and the
review and strengthening of IMF functions.
Progress of regional cooperation
Amid globalization, it is worth noting that we have also witnessed a clear trend toward regionalism or
regional cooperation in various parts of the world. These movements toward promoting regional
cooperation have taken due account of trade and financial relations. For example, in Europe, the
introduction of the euro and the expansion of the EU. In the Americas, the expansion of NAFTA and
dollarization which is being considered by some Latin American countries. In Asia, we have begun to
observe some moves toward closer cooperation as I will describe later.
Can we reconcile these two contrasting trends, the progress of economic and financial globalization on
the one hand, and the strengthening of regional cooperation on the other? One possible interpretation
of this difficult question is that the driving force behind globalization has also made the interaction of
economic and financial activities closer in regions which have a lot in common. For example, the rapid
progress of information and communication technology can be regarded as one of the major factors
supporting the integration of financial markets in the euro zone.
Therefore, globalization and regional cooperation can proceed simultaneously. Furthermore, regional
cooperation, if managed properly, will promote globalization. For example, if there are problems for
which it will take a long time to form a global consensus, it may be possible to reach a consensus
relatively quickly among specific regions. This is a case where regional cooperation lowers barriers to
globalization in countries within the regions concerned.
Furthermore, if there is a common platform for discussion or a framework for solving problems in a
region which consists of countries with similar economic conditions and policy orientation, we may be
able to reduce the cost of global negotiations in the event of international policy conflicts or shocks. In
such a case, regional cooperation may supplement a global cooperative framework. It may sound a
little ironic, but regional cooperation has become all the more significant and important when
globalization progresses rapidly. The global economy of the twenty-first century will most likely be a
multi-layered global network of various forms of regional cooperation.
Regional cooperation in Asia
Now, I would turn to regional cooperation in Asia. Needless to say, Asia is extremely diverse in terms
of culture, politics, and religion. Such diversity entails difficulties in promoting regional cooperation.
In fact, the speed of regional cooperation in Asia has been slow compared to other regions. However,
it is also true that the extent of interdependence has become more widespread and deep as witnessed
by the progress of the horizontal division of labor and increased capital flows in East Asia. In addition,
since the bitter experience of the currency crisis in 1997 has made us recognize the risk of spillover
and contagion, I believe that momentum for actively promoting regional cooperation as a device to
support globalization has steadily increased.
In promoting regional cooperation, let me offer you three important points in the economic and
financial area. First is the strengthening of mutual surveillance. It is a major premise for any regional
cooperation that the countries concerned share a common recognition with respect to the economic
and financial conditions of individual countries in the region, their interdependence, and the risks
inherent in the regional economy.
Second, countries in the region should share a common view of the future direction of the regional
economy and also concrete policy response based on such recognition. Bearing in mind the lessons we
learned from the currency crises, we should improve the functioning of financial markets and foreign
exchange regimes, and also strengthen domestic financial systems and financial supervisory
frameworks. In order to make an appropriate policy response, not only coordination among countries
in the region but also competition among them are very much needed.
Third is participation in global efforts toward the stability of the international financial system, which
is often termed the "New International Financial Architecture" problem. It seems to me increasingly
important to send a coherent message from Asia to such international fora as the Financial Stability
Forum, the Group of Twenty Finance Ministers and Central Bank Governors, and the International
Monetary and Financial Committee.
Having said all this, we should never forget the importance of maintaining the basic philosophy of
"open regionalism" as a major underlying premise to contribute to the stability and development of the
world economy. Central banks also play a very important role in promoting regional cooperation. As
symbolized by the rapid expansion of derivative transactions, we now live in a world where
international capital flows have become extremely complex and the speed at which a shock is
transmitted across borders has accelerated.
In such a world, it is not possible for the central bank of any one country to ensure integrity of the
international financial system. This can be easily understood if we recall such problems as the liquidity
risk involved in foreign exchange and the Herstatt risk in cross-border settlements. To discharge the
responsibility of conducting appropriate monetary policy and maintaining financial system stability as
well as to prevent international systemic risk from emerging, mutual cooperation and coordination
have become increasingly essential among central banks in the region.
In this context, a forum called EMEAP, composed of central banks in the East Asia and Pacific region,
was established in 1991. In this forum, member central banks have been exchanging views and
information regarding economic, financial market, and foreign exchange market developments. They
have also been studying ways to make improvements in such areas as financial markets, settlement
systems, and bank supervisory methods.
Conclusion
In closing, let me briefly touch upon Japan's role in Asia. Given the size of its economic presence and
close relations with countries in the Asian region, Japan should make an appropriate contribution to
regional development. To this end, first of all, Japan itself must aggressively implement structural
reform to realize robust economic fundamentals.
At the same time, Japan should promote further opening and improvement of its domestic markets to
contribute to the efficient and fair allocation of world resources. Particularly in financial markets,
various measures for improvement have been effected. For example, in the benchmark government
bond market, the maturity of bonds has been diversified and the withholding tax on non-residents
lifted.
We should continue such efforts to make domestic markets more attractive for overseas investors.
Through such efforts, I believe and sincerely hope that countries both within and outside the Asian
region will come to have greater confidence in Japan, which, in turn, will contribute to closer and
stronger cooperation in Asia.