Chuo Online

  • Top
  • Opinion
  • Research
  • Education
  • People
  • RSS

Top>Opinion>Toward the Grand Dream of an Asian Monetary Integration


Seiichi Nakajo

Seiichi Nakajo [Profile]

Toward the Grand Dream of an Asian Monetary Integration

Seiichi Nakajo
Professor : Faculty of Economics, Chuo University
Specialty : International Finance and Foreign Exchange Studies

Surplus dollars circling the world

Since the 1990s, currency crises have occurred one after another in Europe, Mexico, Asia, and other regions around the world. Violent fluctuation in prices of crude oil and other natural resources as well as the world financial crisis also hit the world economy from 2007 to 2009.

The causes are, simply put, the expansion of a monetary economy as opposed to a real economy, and massive funds roaming the world in search of investment opportunities. For example, the size of the financial assets in the world is as much as approximately three times larger than the real economy (GDP) in the world. Moreover, thanks to the development of IT technologies, trans-border financial transactions are processed instantly-much faster than goods are traded-and funds injected into those transactions have reached 47 trillion dollars. It is precisely when such massive funds roam the world-in excess of the necessity for the international trade of goods-that the economy faces an impending crisis.

The largest cause for the bloated monetary economy was the United States letting dollars flow throughout the world due to their enormous current-account deficit. Because the U.S. has the great privilege of importing anything in the key currency that is their home currency, they are not moderate enough to balance the current account. As a result, they continue to accumulate a current-account deficit. Their current net foreign debts have piled up to reach as high as 3.5 trillion dollars. This unprecedented debt could only be incurred by the U.S. because the key currency is their home currency.

However, they cannot continue borrowing money forever and there is concern throughout the world that the global economy might one day stall. In particular, confidence in the U.S. economy as well as the U.S. dollar is nearly lost because the recent world financial crisis originated in the U.S. This led to growing fear all around the world that turmoil might result every time excessive dollars roam about seeking preferable investment opportunities, and that the dollar could one day crash.

Asian monetary integration to escape from the dollar

What should be done to resolve this issue? One fundamental solution would be to create a world currency similar to SDR as the international currency without nationality, instead of the regime where only a specific country enjoys privileges. This is the ideal, however, and it would be very difficult to achieve right away.

Europe created the euro toward that end, with cooperation throughout the region to expel dollars at least from inside Europe in order to escape from the unstable dollar. Asia, which has been part of the dollar block so far, learnt from the currency crisis how dangerous it is to depend excessively on the dollar and realized during the world financial crisis the vulnerability of the U.S. financial system and the deteriorated confidence in the dollar. From these lessons has emerged a grand dream of escaping from the dollar by introducing a new Asian common currency. If this dream came true, the currency would no longer fluctuate within the Asian region, enabling stable trade and financial transactions. It would also achieve a currency block where all participant nations are equal without any privileges given to limited nations.

Unfortunately, however, achieving this dream would require going the long and tough road. For a new common currency to be created replacing the dollar, Asian economies would have to be unified and homogeneous as if they were part of a single nation. In reality, however, Asian countries are markedly diverse in that there are various nations ranging from major powers to small states; from rapidly growing economies to stagnant ones; and from countries with advanced industrial and trade structures to ones focusing on natural resources or agriculture. It is, therefore, difficult to immediately introduce a common currency and manage the Asian economy as a whole through financial policies based on such a common currency. At this point, it is impossible to operate S.S. Asia with a single helm after all.

China holding the key, Japan's currency diplomacy tested

Achieving this great dream would take thirty to fifty years, and it would require overcoming the many immense obstacles strewn along the way. The most important problem is, of course, whether or not it is really possible to integrate or homogenize such diverse Asian economies. Another concern is whether or not the integration can be agreed on, given the difference in political regimes and the cultural diversity.

The strongest misgiving, among other things, would be Chinese intentions. In the case of Europe, Germany, and France-with almost equal economic power-they finally managed to realize a monetary integration with their strong cooperative relationship and leadership, seeking the broader goal and setting aside their minor differences. To the contrary, Japan and China as Asian leaders have a sense of political distrust against each other. It is also highly likely that the economic disparity between their economic power will expand several times in several decades to make China the Gulliver economy in Asia. If China as Asian superpower were to employ the policy of internationalizing their home currency renminbi to turn Asia as a whole into the renminbi block, the dream would vanish.

Such a case would cause the heaviest damage on Japan, potentially resulting in its decline, becoming a lesser country in Far Eastern Asia, and harming the interests of Asia as a whole. In order to avoid such developments, now is the time for Japan-currently maintaining economic power equal to China's-to take active currency diplomacy to persuade Asian states to support the monetary integration. Japan's diplomatic skills such as broadened dialogues with China and negotiation strategies involving India and other Asian countries would be tested under this situation.

Seiichi Nakajo
Professor on the Faculty of Economics at Chuo University
Professor Nakajo was born in 1949 in Niigata Prefecture. He graduated from the Department of Economics on the Faculty of Economics at Chuo University in 1971.

He also graduated from the Master's Program of the Graduate School of Economics at the same institution in 1973. He received his Doctor of Business degree from Osaka City University in 1991.

He has been a researcher for Nissho Iwai Corporation, and an Associate Professor and Professor on the Faculty of Business at Osaka City University before becoming a Professor on the Faculty of Economics at Chuo University in 1996.

Professor Nakajo is a board member of The Japan Society of International Economics, and a member of The Japan Society of Monetary Economics and The Japan Academy for International Trade and Business.

He specializes in International Finance and Foreign Exchange Studies, and his current research interests include the relationships among the currency crises and the global financial crisis with monetary and financial cooperation in Asia, the monetary integration in Asia, and issues related to the Chinese renminbi.

Professor Nakajo's major publications include The Floating Rate System and Foreign Exchange Strategies [Hendo Soba to Kawase Senryaku] (co-author, Kinzai Institute for Financial Affairs, Inc.); Exchange Risk Management of Trading Companies [Boeki Kigyo no Kawase Risuku Kanri] (Toyo Keizai); Foreign Exchange Risk Management Seminar: Strategies under the New Foreign Exchange Law, New Edition [Zemina-ru Kawase Risuku Kanri: Sin-Gaitame-Ho ka no Senryaku, Shinban] (Yuhikaku Business); and Monetary and Financial Cooperation in Asia and the Monetary Union [Ajia no Tsuka Kinyu Kyoryoku to Tsuka Togo] (Bunshindo, forthcoming).