Monetary Cooperation and an Optimal Exchange Rate Basket in East Asia (Formerly known as Financial Cooperation in East Asia and the Optimal Currency Basket)

2009 - 2010

In the aftermath of the global financial crisis of 2007-2009, the key currency status of the U.S. dollar has been questioned. Several proposals have been made to reform the international monetary system. One of the main focuses of our project "Monetary Cooperation and an Optimal Exchange Rate Basket in East Asia" has been to create a basket currency (unit) in the East Asian region, with the presumption that making the intra-regional exchange rates stable, at around the basket currency unit, is desirable for the region. Research has been conducted on policy issues, including monetary and exchange rate policy, and private sectors' reactions to monetary and exchange rate changes, including behaviors that affect the pass-through of the exchange rate to domestic prices. We have published the Asian Monetary Unit (AMU) and its deviation indicators on the RIETI web page since 2005, contributing to research on the exchange rate coordination and trade invoicing in the region.

2008

This project takes the position that the adoption of a common currency basket constitutes a desirable and highly promising choice for the Asian region in the future. Given this point of departure, this project focuses on matters linked directly to policy, such as foreign exchange policies and monetary policy management leading up to a transition to a common currency basket, and the desired composition and structure of the basket. One of the research products of this project is the Asian Monetary Unit (AMU) Data, which has been posted on the RIETI website since September 2005 and is being visited from Japan and overseas (1288 average monthly visits during fiscal 2008). Among various issues emerged from the above themes, we have researched the pass-through problem or the impact of currency fluctuations on domestic prices, and the problem of the invoicing currency or the choice of the currency of denomination in export and import trade. In addition to conventional methods based on macroeconomic models, we did microeconomic analysis during fiscal 2007 featuring interviews with Japanese-affiliated companies concerning their foreign exchange strategies (invoicing currency, risk management) in export and import trade. For fiscal 2008, the project aims to obtain microeconomic and macroeconomic results pertaining to the optimal currency basket and the pass-through and invoicing currency problems, and to use these in formulating policy recommendations that are consistent with administrative needs.

2007

This project takes the position that the adoption of a common currency basket constitutes a desirable and highly promising choice for the Asian region in the future. Given this point of departure, this project focuses on matters linked directly to policy, such as foreign exchange policies and monetary policy management leading up to a transition to a common currency basket, and the desired composition and structure of the basket. One of the research products of this project is the Asian Monetary Unit (AMU) Data, which has been posted on the RIETI website since September 2005 and is being visited from Japan and overseas (768 average monthly visits during fiscal 2007). Among various issues emerged from the above themes, we have researched the pass-through problem or the impact of currency fluctuations on domestic prices, and the problem of the invoicing currency or the choice of the currency of denomination in export and import trade. In addition to conventional methods based on macroeconomic models, we did microeconomic analysis during fiscal 2007 featuring interviews with Japanese-affiliated companies concerning their foreign exchange strategies (invoicing currency, risk management) in export and import trade. For fiscal 2008, the project aims to obtain microeconomic and macroeconomic results pertaining to the optimal currency basket and the pass-through and invoicing currency problems, and to use these in formulating policy recommendations that are consistent with administrative needs.

2006

The U.S. current account deficit widened from 2004 through 2005, reaching as high as 7% of the GDP, while China's current account surplus expanded, exceeding 5% of the GDP. If we combine China's figures with those of Japan, South Korea, and the ASEAN countries it can be seen that East Asia is recording a very large trade surplus with the U.S. If the U.S. dollar were to fall during the course of resolving this imbalance, in the absence of a cooperative relationship in the currency system in East Asia a number of countries could have an excessive appreciation burden imposed upon them, or to avoid that would have to spend massively on market intervention. However, if East Asian countries could cooperate to build a joint float mechanism (e.g. a common currency basket), then any shocks felt by East Asia in the course of resolving global imbalances could be mitigated. This research considers a common currency basket to be a desirable long-term option, and our objective is to conduct research linked directly with policy, studying the management of monetary and exchange-rate policies up to the transition to a basket, and seeking the desirable configuration of a basket system.

Until March 31, 2011