TOKYO -- At the height of the Asian financial crisis, Japan called for the establishment of an Asian version of the International Monetary Fund to help restore financial stability to the region. However, in the face of strong opposition from the U.S. and a reluctance to support it from China, the Asian Monetary Fund never got off the ground.
Twenty years on, Eisuke Sakakibara, Japan's top international finance bureaucrat at the time, or "Mr. Yen"as he is also known, sat down with the Nikkei Asian Review to reflect on the AMF and discuss some lessons for the future.
Sakakibara said the fund was conceived because the IMF "didn't know Asia" and "its remedies were likely to do great damage to the Asian economy" -- an appraisal that proved accurate in the eyes of many experts.
Citing a lack of communication with Beijing as a major miscalculation, Sakikabara stressed close dialogue with the rising superpower is today needed more than ever to ensure regional financial stability. This is particularly important as an economic collapse in China would constitute the greatest risk to Asia.
Q: What was the purpose of the AMF and why did it fail?
A: At that time, the IMF didn't properly address the crisis. We were angry about that. That is why we planned to establish Asia's own version of the IMF. The ASEAN countries and South Korea supported the idea, but the U.S. didn't. The former U.S. Treasury Secretary Lawrence Summers strongly opposed it, because he foresaw it weakening America's financial influence in Asia. China was also reluctant to support it. I think it was because China was not in favor of a Japanese initiative. In retrospect, Japan lacked contacts with top Beijing officials. We asked their counterparts in Hong Kong to connect us with them so that we could explain our intention but it did not work. In short, Japan failed to lay the groundwork with China.
Q: Had the AMF materialized, would the world have been different?
A: Not really. What we aimed for in the AMF has been achieved by the AMRO (ASEAN+3 Macroeconomic Research Office), established in 2011 to conduct surveillance and research on Asia's macroeconomic situations and to provide consultation in case of a crisis. Japan and China equally contribute to the organization. True, the AMF would have been given a lending function -- in that sense, the two are not the same. But at least, Asia now has the AMRO's research and assessment function.
Q: Do you think the AMF would have helped the Japanese yen secure a better position as a key currency in Asia?
A: No. I know some people argued that the AMF was designed to pave way for the yen to become a stronger international currency. But I didn't think so because the dollar had solidified its position in that respect.
Q: In what sense was the IMF wrong in responding to the crisis?
A: The IMF did not know Asia. It applied principals which are suitable for developed nations to Asia's developing economies. Absurdly, they forced fiscal consolidation on countries at a time of crisis. They shut down financial institutions -- a measure that will squeeze the economy. They also introduced capital liberalization, forcing countries to move from a pegged exchange system to a flexible one. If you do that at a time of crisis, the outcome is obvious -- it will cause the currency rate to collapse.
All these measures exacerbated the Asian financial crisis. The IMF proposed many structural reform plans, but they didn't work. Asia has its unique economic structure, characterized for example by large family-owned conglomerates. The IMF and the U.S. called it cronyism and tried to change it. All they had in mind was to "reform" the economy. But a country's economy is rooted in its culture and has a long historical background. It cannot be changed overnight.
Q: Did you tell the IMF that their approach was wrong?
A: Yes, a lot. We had heated discussions. But they didn't listen to us. At that time, the IMF was backed by the U.S. So, they were confident and firm about their ideas.
Q: Looking forward, what are the chances that we will see another Asian financial crisis? What is likely to be the trigger?
A: I think the next crisis could happen if the Chinese economy tumbles. China's economic power has been significantly strengthened; so I would say I worry about the negative impact it would have on Asia if there were a steep downturn. That would hurt Southeast Asia especially, as it is more deeply connected with China. The important question is whether China can make a smooth transition from a phase of rapid growth to one of stable growth. Managing the transition will not be easy. The economic bubble may burst, or something else may go wrong if managed badly.
Q: Do you think Asia is prepared for a potential future crisis?
A: Asia has become significantly strong [in the past 20 years]. China and India are becoming big economies, and Southeast Asia is also more resilient. Foreign reserves have grown. Plus, the Chiang Mai Initiative and other regional cooperation frameworks have been developed. The important thing is to create a framework of collaboration to respond to crises. We could strengthen the existing frameworks even further. One idea is to invite India and other Asian economies to those frameworks.
Q: China has launched multiple initiatives to expand its economic clout such as the Asian Infrastructure Investment Bank. How do you see them affecting regional cooperation mechanisms?
A: China will become a significantly larger economy that will surpass the U.S. in terms of gross domestic product. China envisions this rise and has taken steps to capitalize on its global leadership. They want to make the Chinese yuan a key currency in the region. I think the important issue is how well the three Asian economic powers -- China, Japan and India -- will collaborate in addressing the challenges to the region's economy. It is probably helpful for Japan to collaborate more with India [China's rival neighbor]. That would bring China closer to Japan and create opportunity for the two to work together.
Q: How can the Japan-led Asian Development Bank collaborate with the AIIB?
A: There is huge demand for infrastructure in Asia, which cannot be covered by the ADB alone. The two banks should work together to support more projects. Collaboration between them means collaboration between Japan and China, which I think is a positive movement.
Interviewed by Nikkei staff writer Kentaro Iwamoto