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. * 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

market economies, many countries, such as thailand, korea, russia and brazil, suffered quintessential foreign currency funding problems. meanwhile, we saw another type of crisis : if a classic financial crisis is precipitated by bank runs, the new type of crisis results from impairment of market functioning and such crisis could be termed a “ market run. ” when long term capital management ( ltcm ) almost collapsed last autumn, liquidity dried up in many markets of the developed countries as many market participants dumped their assets in “ fire sales ” and flight to quality became ever more pronounced. if we recognize that an important function of financial markets is to price financial assets and transfer risks at that price, i. e. “ price discovery, ” the impairment of such a function is threatening to market participants. why are international crises becoming more pronounced? having said that the four features of recent international financial crises are the interactions between macroeconomic imbalances and the functioning of the financial system, the volatility of short - term capital flows, international contagion, and diversity in the manifestation of crises, i would like to spend some time to discuss why these changes might have occurred. i do not have a definite answer, but i agree with many experts who point out that financial innovation and globalization, enabled by advances in information technology, had a role. for example, cross - border flows of capital have increased more than threefold in the last ten years. what strikes us more is that the cross - border transfer of risks increased rapidly through derivatives transactions. as a hypothetical case, if we think of an investment in a bond denominated in thai baht issued by a thai firm, the investor faces various risks : foreign exchange risk, credit risk of the firm, interest rate risk, etc. derivatives enable investors to unbundle these risks packaged in a bond into component risks – e. g. the risk that the credit standing of the issuing firm or the thai baht exchange rate falls below a certain threshold – and transfer and / or assume them at will. financial innovation has enabled market participants to engage in these operations at significantly lower costs, and this has resulted in an expansion of transaction volumes. the expansion in transaction volumes draws the attention of market participants to the need of more harmonized rules underlying financial transactions – payment and settlement systems and accounting standards – and encourages reforms therein. these reforms push the rules in the direction of standardization, which in turn, lower the costs of transactions and leads