Comment on 'Yen Bloc: towards economic integration in East Asia'
Abstract
This is an important book. While I think that the argument in favour of a yen bloc is deeply flawed, C.H. Kwan’s book is a must-read for those interested in East Asian regionalism and integration. It is one of the clearest and best-written expositions of those who propose deeper financial and monetary integration through the formation of a yen bloc. This topic needs to be debated more, and Kwan provides an excellent start. He makes two basic points. The first is that regionalism is on the rise in East Asia, manifest not just in political and trade discussions but also in thinking about finance, monetary systems, and exchange rates. The region is becoming more integrated economically. He describes a virtuous circle between interdependence and economic growth in East Asia. Through trade and investment, industrialisation has spread first from Japan to the newly industrialised economies of East Asia (Hong Kong, Korea, Singapore and Taiwan), and then to ASEAN and China. This has transferred technology, industrial know-how, and capacity. Combined with the waning of ideology, it has enabled countries like China and Vietnam to open their economies and exploit their great advantages in producing and selling labor-intensive goods. The result is an intra-regional growth dynamic and fundamental interdependence, secured by strengthening government ties. Kwan argues that the East Asian financial crisis revealed the need for regional monetary cooperation to support the economic links. Indeed, he senses a new appetite for cooperative exchange rate arrangements in East Asia. Kwan’s second point is that Japan is the biggest economy in the region and it is the natural leader for cooperative exchange rate arrangements in East Asia, focused on the yen. He argues that a yen bloc would be good for Japan, good for East Asia, and good for the world. A yen bloc is good for Japan because it helps internationalise the yen, which helps Japanese firms manage foreign exchange risk, and it promotes Tokyo as a global and regional financial center. Moreover, it puts healthy policy discipline on Japan. A yen bloc is good for East Asia because it provides it with intra-regional exchange rate stability and promotes further integration in the region. While Kwan thinks that Japan has to do more reform in order to lead East Asia, he argues that it has actually made considerable progress, as shown by the ‘big bang’ of major financial and accounting reforms announced in 1996. He also thinks that a yen bloc would be good for the world because it would provide balance to Europe and, more importantly, the United States in international finance and in policy making. He reckons that an integrated East Asian yen bloc would be the third leg in an emerging tripolar world based on the Americas, Europe, and Asia.