Obuchi Refloats Idea of Asian Monetary Fund
President Clinton clearly resisted the temptation to play the
savior last week, sending Japanese Prime Minister Obuchi home
empty handed. Whether Clinton was showing extraordinary good
sense, was relieved at public reaction to his Grand Jury
testimony, or was hemmed in by Federal Reserve Chairman Alan
Greenspan's refusal to countenance a coordinated interest rate
cut is immaterial. Clinton resisted. Interestingly, Greenspan
then went on to announce the likelihood of interest rate cuts,
which buoyed world markets without decreasing pressure on
Japanese banks.
The consequences of Obuchi's failure to extract American help
started to appear Sunday night, as Japan Leasing Corporation went
bankrupt -- over $16 billion in debt and with no hope of
recovery. The hopelessness of its situation was made clear in
Japan's Diet, which finally hammered out an agreement that
appeared to have some possibility of lasting longer than a day.
The agreement saw the Japanese ruling LDP abandon its position
that government funds should be used to save ailing financial
institutions. In a compromise with its opponents, the LDP agreed
that funding would be provided to buyers of ailing banks, but not
to the banks themselves. In other words, depositors would be
saved, along with some investors, but the management of the banks
would be punished. With all hope lost, Japan Leasing, a
subsidiary of the ailing Long Term Credit Bank of Japan, went
under. Japanese markets actually rose on the news, relieved that
the blood-letting was about to begin.
In the midst of this excruciating process, the Japanese
leadership is desperately searching for a policy to call its own.
Recognizing finally that Japan's problem and Asia's are one and
the same, Japan is refloating a potentially historical idea.
According to Japan's Kyodo News Service, Japan will propose at
the upcoming G-7 meeting that an Asian Monetary Fund be
organized. According to Kyodo, which is usually well informed,
Japanese diplomats are now in the process of coordinating with
other Asian countries to present a coherent framework. This idea
was proposed previously by Japan and other Asian countries, but
was rejected by the United States. Obuchi seems to have decided
that if Clinton was not prepared to help Japan, then Japan was
under no obligation to remain within the American conceptual
framework.
The basic idea of an Asian Monetary Fund is the same one that
underlies the International Monetary Fund. Asian countries would
pool their remaining foreign reserves and use that war chest to
defend the currencies of weaker countries when faced by sudden
and unexpected outflows of capital. This is the role that the
IMF is supposed to play. However, IMF funding usually comes with
strict requirements, including budget cuts, closing failing
financial institutions, writing off bad loans, and opening
markets to foreign competition. In this sense, the IMF is
increasingly seen by Asia as an American tool, used to pry open
closed markets and destabilize potential competitors.
Since the Japanese are not getting much direct help from the
U.S., and since the IMF has become increasingly suspect
throughout the region, an Asian Monetary Fund has become an
increasingly important idea. It would be expected that it would
provide funds without the onerous requirements of the IMF. This
would mean that the existing social and economic structures would
not be destabilized. In other words, an Asian Monetary Fund
would do what the IMF does without the toll that IMF help exacts.
Of course, there is more than a bit of fantasy involved here.
All of Asia is in financial meltdown and monetary reserves have
drained out of the region. The idea that Asia can collectively
protect their currency, where not one of them has been able to do
so, is arithmetically dubious. First, it assumes that there is a
reserve to draw on. Second, it assumes that financial imbalances
will courteously queue up, allowing a limited asset to be
sequentially allocated. Finally, it assumes that stronger
nations will willingly pool sufficient cash to protect weaker
nations, in spite of the fact that this will increase their own
vulnerability.
In spite of these obvious weaknesses, the idea has a growing body
of supporters in Asia. It is a logical expression of the growing
Asianist bloc in the region. It also is said to have some
American supporters, like Paul Volcker, former Federal Reserve
Chairman, whom former Prime Minister Miyazawa claims is in favor
of it. It is certainly not something entirely against U.S.
interests, since it forces Asia to clean up its own mess and
excuses the U.S. from any action. In the long run, however, an
Asian Monetary Fund has profound implications.
Given its obvious weaknesses, such a fund could not function in
the short-term without some degree of regional currency control.
For the reasons given, the AMF could not, by itself, stanch the
outflow of money from a major country, like Korea. However, its
infrastructure could serve as an instrument for the
administration of regional currency controls. If that were done,
short-term fluctuations could be avoided, while the reserve fund
could be organized as an Asian version of the Eurodollar to
facilitate regional trade.
It is extraordinary how far we have gone. Japan, which has
eschewed regional political leadership and which has benefitted
most from Breton Woods, is now essentially moving to create a yen
bloc. We suspect that this is not what Obuchi really wants. By
leaking that he is planning to offer the proposal at the G-7
meeting, he is trying to warn the United States of the
consequences of its unwillingness to help Japan. As a bluff it
is unlikely to work. A massive U.S. bailout of Asia is not going
to happen in the current American political climate.
Therefore we are in a classic situation where a desperate bluff
may well turn out to be policy. Since Japan and the rest of Asia
cannot genuinely restructure their economies without being
willing to endure social upheaval, they are going to trade long-
term recovery for short-term stability. This has been their
policy all along. It is a policy that has so enervated their
economies that the only way to maintain their dilatory policies
is with a modest step with radical implications. If Asia creates
an Asian Monetary Fund, it will not stop until it creates an
Asian currency bloc under Japanese leadership. When that
happens, and we believe it will, the very texture of the
international system will have changed irretrievably. We are
entering a world of regions, replacing the much-vaunted global
economy.
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