The financial crisis of 2007 created currency turmoil on a global scale. Many economies that were dependent on the U.S. dollar also faced problems as the currency status of the U.S. dollar came into question. The push for the creation of an East Asian Community that would enhance independence and provide regional stability has once again gained momentum of late. This month's RIETI Report focuses on regional monetary coordination in Asia following the global financial crisis through the examination of the stability of intraregional exchange rates based on two different frameworks: ASEAN+3 (Japan, China, and South Korea) and ASEAN+3+3 (India, Australia, and New Zealand).

The month's contributing author, Eiji OGAWA, is a RIETI faculty fellow and professor of Hitotsubashi University, Graduate School of Commerce and Management (International Finance). Dr. OGAWA utilizes the AMU-wide Deviation Indicators (published daily on the RIETI website), which measure the degree of fluctuation of each component currency of the AMU-wide regional currency basket, to investigate whether intra-regional exchange rates increase in instability or deviation when India, Australia and New Zealand join ASEAN+3.

In consideration of robust discussions on the possible creation of an East Asian Community encompassing ASEAN+6 (Japan, China, South Korea, India, Australia, and New Zealand), this discussion paper examines the stability of the intraregional exchange rates. In contrast to Ogawa and Yoshimi (2009) which focused on exchange rate stability within the framework of ASEAN+3 (Japan, China, and South Korea), this discussion paper empirically analyzes the stability of intraregional exchange rates under two different frameworks. The first framework is ASEAN+3+3, which includes the Indian rupee, the Australian dollar, and the New Zealand dollar in addition to the ASEAN+3 currencies, whereas the second includes just one additional currency, the Indian rupee, apart from the ASEAN+3 currencies.

In the analysis for this paper, I used AMU-wide Deviation Indicators (AMU-wide DI) published on the RIETI website, which measure the degree of fluctuations of each component currency of the AMU-wide regional currency basket. From around mid-2000, the weighted average of AMU-wide DI has consistently exceeded that of AMU DI, in which AMU-wide and AMU respectively correspond to ASEAN+3+3 and ASEAN+3. Meanwhile, a closer look at the weighted average of AMU-wide DI shows that the Australian dollar and the Indian rupee - along with the Japanese yen, the Chinese yuan, and the South Korean won - have made relatively large contributions to the weighted average.

Findings from the analysis of β-convergence and σ-convergence show that component currencies within all of the three frameworks - i.e. ASEAN+3, ASEAN+3+3, and ASEAN+3 plus the Indian rupee - showed a strong tendency to deviate in between January 2005 and February 2010, a turbulent period that witnessed the boom of yen-carry trades, the surfacing of the sub-prime mortgage loan problem, and the collapse of Lehman Brothers. However, in the period between January 2001 and January 2005, during which the currency situation was relatively stable, the ASEAN+3 currencies showed a tendency to converge but no such tendency was observed for the other two frameworks of ASEAN+3+3 and ASEAN+3+India. Meanwhile, a comparison between ASEAN+3+3 and ASEAN+3+India in the period between September 2008 and January 2010 found that in the relative term, the tendency to converge was relatively larger for the latter than for the former.

These empirical findings have the following policy implications. First, in pursuing monetary coordination for intraregional exchange rate stability, it will be easier to start with the framework of the Chiang Mai Initiative (CMI), a network of bilateral currency swap arrangements already in place in East Asia, because intraregional exchange rates within ASEAN+3 countries, which are covered by the CMI, have shown greater stability than those under a broader framework that also includes the Indian rupee, the Australian dollar, and the New Zealand dollar. Second, in expanding the framework for monetary coordination as the next step, only the Indian rupee - rather than all the three remaining currencies - should be included because intraregional exchange rates within ASEAN+3+India have been relatively stable as compared to those within ASEAN+3+3. The presence of a currency swap arrangement between Japan and India, which is similar to those under the CMI, would also facilitate the inclusion of the Indian rupee as an additional currency for regional coordination.

RIETI Symposium

No events are scheduled at the present time.

Brown Bag Lunch Seminars

(All BBLs run 12:15 - 13:45, unless otherwise stated.)

July 16, 2010
Speaker: SASAJI Ken (Director, Energy Research and Public Relations Office, Agency for Natural Resources and Energy, METI)
Speaker: KUNIMINE Kosuke (Assistant Manager, Energy Supply and Demand Policy Office, Agency for Natural Resources and Energy, METI)
Moderator: KAINOU Kazunari (Fellow, RIETI)
"Meeting Global Challenges and Securing Energy Futures: 'The Strategic Energy Plan' of Japan and 'Energy White Paper 2010'"
(in Japanese)

July 21, 2010
Speaker: TANAKA Tatsuo (Faculty Fellow, RIETI / Associate Professor, Faculty of Economics, Keio University)
Moderator: NEZU Risaburo (Director, RIETI)
"From Modular System to Integral System - An implication of iPad"
(in Japanese)

July 26, 2010
Speaker: NAGAYAMA Osamu (President and CEO, Chugai Pharmaceutical Co., Ltd.)
"Topic: TBA"
(in Japanese)

July 29, 2010
Speaker: MORINOBU Shigeki (Professor, Chuo Law School / Chief Research Fellow, the Tokyo Foundation)
Speaker: SATO Motohiro (Professor, Graduate School of Economics, Hitotsubashi University)
Moderator: HOSAKA Shin (Director, Corporate Affairs Division, Economic and Industrial Policy Bureau, METI)
"Mirrlees Review and it's implication for Japanese tax reform"
(in Japanese)

August 13, 2010
Speaker: OKAZAKI Hideto (Secretary-General, TAMA Industrial Vitalization Association Inc.)
Commentator: SHIBUYA Hiroshi (Director, Regional Technology Division, Regional Economic and Industrial Policy Group, METI)
Commentator: HARAYAMA Yuko (Professor, Management Science & Technology, Tohoku University / the Japan Society for Science Policy and Research Management)
Moderator: KODAMA Toshihiro (Managing Executive Officer, Micro Business and Individual Unit, Japan Finance Corporation)
"New Development of Industrial Clusters as seen in TAMA Association and its Overseas Business Support Program"
(in Japanese)

August 26, 2010
Speaker: SASAKI Tsuneo (Special Adviser, Toray Corporate Business Research, Inc.)
"Work-life Balance as an Accelerator of the Development of Workers and Companies"
(in Japanese)

September 22, 2010
Speaker: GOTO Kazuko (Professor, Faculty of Economics, Saitama University)
Moderator: TANAKA Ayumu (Fellow, RIETI)
"Strategies towards Cultural and Creative City : Geographic Agglomeration of Creative industries in Tokyo"
(in Japanese)

For a complete list of past and upcoming BBL Seminars, http://www.rieti.go.jp/en/events/bbl/index.html

Fellow titles and links in the text are as of the date of publication.

For questions or comments regarding RIETI Report, please contact the editors.

RIETI Report is published monthly.