November 12, 2004
FXstreet.com. The Forex Market
TOKYO (AFX) - Bank of Japan (BoJ) Governor Toshihiko Fukui said it would have a stablizing effect on the global financial system if a clear rival to the US dollar as a key global currency were to emerge.
Speaking at a symposium in Tokyo on the theme "The Euro: Five Years On -- Implication for Asia", the Japan central bank chief cited data showing the common currency of the 12-nation European currency bloc is emerging as a serious rival to the dollar as a key currency for conducting global trade and investment.
"In the past five years (since its launch in 1999), the importance of the euro has increased considerably," Fukui told the seminar, which featured such other speakers as European Central Bank vice-president Lucas Papademos, and Toyoo Gyohten, the highly respected former Japanese vice-minister for international affairs. Fukui said more than 50 countries link their currencies to the euro, while the proportion of foreign exchange reserves held in euros has risen to 20 pct, and nearly a third of the cross-border-issued bonds are now denominated in euros. Fukui seemed to welcome the growing prominence of the euro by referring to the dangers associated with allowing any single currency to dominate global commerce.
"In such a situation, the economy of the key currency is easily tempted to focus its economic policy on domestic considerations," an apparent thinly veiled rebuke to the economic policies followed by the US adminstration of President George W Bush.
"In today's globalized economy, this could lead to undesirable ripple effects on the rest of the world, through the fluctuations of the external value of the key currency." Fukui said if there were two competing key global currencies, "competition between them could lead to more attention to the external value of key currencies. This could have a positive effect on the stability of the global financial system." The BoJ chief briefly indicated that the Japanese yen also had a role to play in that regard.
"I believe that the yen can and should play a larger role in the global market," Fukui said, citing trends which could make that a certainty.
"Considering the deepening economic relations between Japan and the rest of Asia, Asia should benefit if the use of the yen could be facilitated," Fukui told his high-powered audience
In 2003, nearly half of Japan's foreign trade was with Asia, up a third over the past decade.
Fukui said the yen could play a larger role in both fund management and fund-raising, especially in light of Asia's strong demand for capital and Japan's vast pool of savings.
But the Japanese central bank chief dismissed the notion that an Asian equivalent to the euro -- an Asian common currency -- would emerge within the lifetime of any of his grey-haired listeners
"Could we see a common currency area in Asia? For the near future, you would agree that this is quite unlikely," Fukui said.
He subsequently indicated it could be 50 years before Asia has a common currency -- the time it took a handful of Europe's nations to embrace the concept.
Great changes would need to occur, such as the development of vibrant regional financial markets, made possible by liberalized cross-border capital flows.
Fukui said there is encouraging evidence that that is already happening, beyond merely the tremendous increase in inter-Asian trade.
He cited in particular the example of the Asian Bond Fund II project, promoted by the 11 central banks of the EMEAP economies. EMEAP stands for the Executives' Meeting of East Asia-Pacific Central Banks, an organization founded in 1991 by the central banks of Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand.
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