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'Asian dollar' still a dream

By Liu Junhong (China Daily)
Updated: 2008-10-22 10:08

The current financial crisis has put the credibility of the US dollar in serious doubt while calls for multi-polarization of the international monetary system have grown. Some people have even suggested that now is a good time to introduce an "Asian dollar".

Looking at the resume of the euro as a single regional currency, however, one realizes that the buildup of an "Asian dollar" still lacks many indispensable conditions, which a financial crisis cannot create.

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The idea of an "Asian dollar" can be traced back to a couple of background factors. One is Japan's "strategy to internationalize the Japanese yen for the 21st century" announced in 1999; the other is the birth of the euro on January 1, 1999 and the intent to challenge the hegemonic position of the US dollar began to emerge in the power structure of the international currency system.

The development of the two currencies joined the tide of East Asian regional cooperation and gradually spread an "Asian dollar dream" across the region.

The internationalization of the yen aims to turn it into a key international currency used in denominating international trade and investment and as foreign reserves. In short, it is aimed at making the yen a widely used currency in transactions around the world.

In fact, as early as the 1970s, the Japanese government raised the issue of yen internationalization when it used the yen as a means to divert the risks of the US dollar and ensure Japan's foreign trade interests.

In the early 1980s then US President Ronald Reagan offered the "concept of yen internationalization" to Japan. But, because Reagan's version of "yen internationalization" was designed only to nudge open Japan's financial market, it was naturally rejected by Tokyo without implementation.

The yen internationalization strategy for the 21st century was designed by Japan on its own and is aimed at advancing the multi-polarization of the international monetary system. Then Japanese Prime Minister Keizo Obuchi emphasized that yen internationalization should begin in Asia.

As a matter of fact, after the East Asian financial turmoil of 1997, the tide of regional cooperation gained strength and helped Japan's yen internationalization strategy achieve some initial results.

For example, Japan's yen-denominated export to Asian countries accounted for over 50 percent of its total in 2002, indicating the level of yen internationalization in Asia rose noticeably.

It is seen as one of the conditions for the Japanese yen to be the leading currency in the Asian monetary system, and a motive of the "Asian dollar concept".

As far as historical conditions for the birth of the euro are concerned, the European currency unit (ECU) and European currency unit system were undoubtedly indispensable conditions for the ultimate adoption of the euro. To push for the creation of the "Asian dollar", Japan also brought up the concept of "the Asian currency unit" and an "Asian common currency". On the road toward creating the "Asian dollar" Japan has been a pioneer.

Faced with the US financial crisis, Japan's Finance Minister Shoichi Nakagawa suggested that the International Monetary Fund (IMF) should establish a framework to ensure financing for emerging economies in case of an emergency, as a means to prevent financial crises from victimizing emerging markets. The proposal captured worldwide attention immediately and was regarded as another framework that Japan had put forward to challenge the US dollar system since the East Asian financial storm ended.

After the Asian financial storm Japan took the lead by offering to set up an "Asian Monetary Fund" with $100 billion out of its own pocket. Then US Treasury Secretary Robert Rubin saw this initiative as a challenge to the US dollar system and promptly shot down the idea by branding it a threat to the International Monetary Fund's authority.

Actually there is no fundamental difference between the two solutions proposed by Japan. Both stressed using the Japanese system to make up for the shortcomings of the IMF and share the latter's functions. It is widely known that the IMF is the center pillar of the US-led international monetary system established after World War II. It is in charge of adjusting the provision of global liquidity and plays the role of "the final lender". In short, it is an instrument to secure the US dollar's hegemonic position.

To break the US dollar hegemony the IMF's functions must be taken and its role reduced. That's the motive behind Japan's new concepts of targeting the IMF by offering to "share" its responsibilities. The objective of Japan's strategy, meanwhile, is to establish a yen-dominated international monetary system. Here no choice is more reasonable than creating the "Asian dollar", which is also the destiny of the yen Japan has been dreaming about for over 130 years.

The thing is, although the current US financial crisis has damaged the market credibility of the US dollar, it is no obvious condition for the birth of the "Asian dollar". The reason is that, as a key criterion for having a single regional currency, Asia must achieve "inflation parity" first.

Right now the world is seeing widespread inflation, but in Asia the levels of inflation are very uneven. Japan, in particular, still enjoys an inflation rate way below the 3-percent "standard", while other countries in the region are in the typical state of inflation and even high inflation. This is a matter of regional structure rather than of prosperity cycle.

To achieve "inflation parity" there must be "free human movement within the region" first. But in Asia, with its dense population, large gap between rich and poor and diverse levels of economic development, neither Japan nor any other Asian nation can afford free human movement. Furthermore, a single regional currency also needs adequate funds and capital markets to lean on, which means Asia must unify equity and securities markets, which cannot be realized overnight or brought about by the US financial crisis.

The "Asian dollar" may be described as a dream shared by all people in the region. It may also be the common strategy of the region. However, there are usually many real conditions to meet before strategies can be fulfilled. Without committing to meeting all the real conditions a strategy will most likely remain a reverie at best.

The author is a researcher with China Institute of Contemporary International Relations