Japanese trend-followers seem to be gradually shifting their sights from Korea to Taiwan. For the last couple of years, the Hanryu (Korean style) boom, led by the syrupy 2002 Korean TV drama "Winter Sonata" and its hunky lead actor Be Yong-Joon, has captured the hearts of Japanese women. But trends shift; enter Karyu (Taiwanese style). Taiwan's supposedly more realistic dramas with their more macho and rugged actors are drawing increasing attention in Japan. A cafe devoted to the popular Taiwanese drama "Meteor Garden" (which is in fact based on a Japanese manga) is set to open in Tokyo's trendy Shibuya district and Taiwanese movies and TV shows are apparently being snapped up for distribution in Japan. Conversely, Japanese popular culture continues to weave its way in with that of other East Asian (and non-Asian) countries. Economic interdependence has also been increasing in East Asia, yet exchange rate policies in the region are not yet well-coordinated. Could the future East Asian region hold greater monetary integration? A RIETI project is exploring the possibilities.
Faculty Fellow OGAWA Eiji has proposed the Asian Monetary Unit (AMU) and AMU Deviation Indicators for East Asian currencies as new economic surveillance criteria. The RIETI website (http://www.rieti.go.jp/users/amu/index.html) updates and publishes these data on a weekly basis as a joint effort between its "The Optimal Exchange Rate Regime for East Asia" project and the Hitotsubashi University 21st Century COE (Centers of Excellence) project, "Research Unit for Statistical Analysis in Social Sciences." RIETI Report interviewed Dr. Ogawa about the background of his research project, its policy implications, and his future research directions.
Dr. Ogawa has served Hitotsubashi University for the past 20 years. From 1991-1999, he was Associate Professor of its Department of Commerce and has been Professor of its Graduate School of Commerce and Management since 1999. He was also Visiting Scholar at Harvard University (1986-1988), University of California at Berkeley (1992-1993), and the International Monetary Fund (2000). Dr. Ogawa joined RIETI as a Faculty Fellow in August 2004. An expert in international currency and international finance, he has produced numerous publications including Kokusai kinyu sisutemu no seido sekkei -- tsuka kiki go no Higashi Ajia e no kyokun [Institutional Design of International Finance System -- Lessons for post-currency crisis East Asia], University Tokyo Press, 2006 and Kokusai kinyu nyumon [Introduction to International Finance] Nihon Keizai Shimbun, 2002. He holds a B.A., M.A. and Ph.D. in Commerce from Hitotsubashi University.
RIETI: Could you explain what led to the creation of the "AMU and AMU Deviation Indicators" project?
Ogawa: What prompted us to create the Asian Monetary Unit (AMU) and AMU Deviation Indicators was the ASEAN+3 finance ministers' decision to financially cooperate within the region by integrating the Economic Review and Policy Dialogue (ERPD), an economic surveillance process initially held at the deputy ministers' level, into the Chiang Mai Initiative (CMI) framework. Surveillance targets are under the ERPD, however, macroeconomic variables of each country and exchange rates among regional currencies are not subject to monitoring. But to be able to prevent a currency crisis, it is necessary to survey and discuss problems associated with foreign exchange rates as part of the surveillance process. Based on this recognition, we decided to create the AMU and AMU Deviation Indicators as a potential tool of surveillance.
RIETI: In your research, you have indicated the AMU Deviation Indicators have a positive relationship with their effective exchange rates. What are the policy implications of these findings?
Ogawa: During the Asian Currency Crisis we witnessed the de facto dollar peg system maintained by certain Asian countries putting premiums on their currencies, thus boosting the effective exchange rates and hurting the countries' trade balances. One of the lessons we learned from this experience is that we need to seek to stabilize the trade balance by focusing on the effective exchange rates of regional currencies, not their exchange rate against the dollar. The AMU Deviation Indicators are meant to be an attempt to stabilize the intraregional exchange rates. We believe that this -- combined with a simultaneous effort to stabilize the AMU in its relative value to the dollar-euro basket -- will lead to stability of the effective exchange rates of Asian currencies. We reached this conclusion because our analysis found that a positive correlation exists between the AMU Deviation Indicators and the effective exchange rates of the component currencies. Thus, I think it is fair to say that the AMU Deviation Indicators are a useful index in this regard.
RIETI: Among the Nominal AMU Deviation Indicators (Figure 3), South Korea, Indonesia and the Philippines have fluctuated widely and frequently from the benchmark rate in terms of the AMU. At this point in time, what is the significance of these fluctuations?
Ogawa: With respect to the South Korean won, the monetary authorities ceased to intervene in foreign exchange markets about two years ago and the won has since been subject to substantial volatility under the floating exchange rate system. Another factor behind the fluctuations of the won is the general trend of the market -- the weakening of the dollar against other currencies amid rising concern over the increasing current account deficits of the U.S. The ups and downs of the Indonesian rupiah had been primarily attributable to the prolonged aftereffects of the currency crisis. In more recent years, as the aftereffects of the crisis finally began to fade, the rupiah appreciated substantially. But the currency has once again come under downward pressure due to concern about Indonesia's macroeconomic outlook. Among the East Asian currencies, the Philippine peso is the only one that has continued to depreciate. Fiscal deficits and other factors undermining confidence in the peso are causing this continuous depreciation.
RIETI: How long will you continue this project? Would you tell us a little about your future research directions?
Ogawa: I believe that the AMU and AMU Deviation Indicators are an indispensable component of regional monetary coordination in East Asia. Therefore, I want to take on this project on a long-term basis. Also, the Asian Development Bank is now working toward launching an Asian Currency Unit (ACU). This, too, indicates that projects such as ours are important for regional monetary coordination.
As to the future direction of our research, I think we need to try out different ways of calculating the AMU and compare the results with those based on the current calculation method. Currently, in calculating the value of the AMU, which is a basket currency of the weighted amounts of the ASEAN+3 currencies, we weigh each component currency based on its country's share vis-a-vis the total for all the countries in terms of trade volume and gross domestic product (GDP) measured at purchasing power parity (PPP). Additionally, we would like to calculate the AMU using a weight based on other types of economic variables that represent the monetary aspect. Then we would like to examine how the resulting AMU values differ from those based on the current calculation method and the potential implications of the difference. Also, as we plan to review the weights of the component currencies each year, it is necessary to examine how changes in the weights would influence the AMU and the AMU Deviation Indicators.
Dr. Ogawa's papers are available at the following sites:
"The Chinese Yuan after the Chinese Exchange Rate System Reform" (RIETI Discussion Paper Series 06-E-019, 2006)
"AMU Deviation Indicator for Coordinated Exchange Rate Policies in East Asia and its Relation with Effective Exchange Rates" (RIETI Discussion Paper Series 06-E-002, 2006)
"A Deviation Measurement for Coordinated Exchange Rate Policies in East Asia" (RIETI Discussion Paper Series 05-E-017, 2005)
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DOI Takero, Former Faculty Fellow, RIETI / Associate Professor, Faculty of Economics, Keio University
Title: "Fiscal Sustainability and Japan's Fiscal Reconstruction with Tax Increase: Reconsidering Broda and Weinstein's Estimate" (in Japanese)
Leonidas P. DROLLAS, Deputy Director and Chief Economist, Centre for Global Energy Studies (CGES)
Title: "Trends in International Oil Markets" (tentative)
NOBEOKA Kentaro, Professor, Research Institute for Economics & Business Administration, Kobe University
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George MOLENKAMP, Chairman, KPMG Global Sustainability Services
HANAKI Izuru, Director, Research Office, Business Environment Department, Small and Medium Enterprise Agency, METI
ENDO Mikio, Deputy Director, Research Office, Business Environment Department, Small and Medium Enterprise Agency, METI
Title: "White Paper on Small and Medium Enterprises in Japan" (in Japanese)
Jane E. FOUNTAIN, Director, National Center for Digital Government / Professor of Political Science and Public Policy, University of Massachusetts Amherst
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