Asia must adopt managed float: Japan

Asia must adopt managed float: Japan

KUALA LUMPUR (Reuters): Emerging economies in Asia should adopt a managed currency float tied to a trade-weighted basket of currencies, Japan's top financial diplomat Haruhiko Kuroda said on Wednesday.

Kuroda, Vice Finance Minister for International Affairs, said neither the extremes of a free-floating exchange rate or a hard peg would be suitable for developing east Asian markets.

"A desirable system will be one that would prevent excessive fluctuations in the exchange rate while allowing the currency some flexibility to move within a certain range," he told a business conference in the Malaysian capital.

"A possible option for emerging East Asian economies might be a managed exchange rate regime in which the currency moves within a certain range with its center targeted to a basket of major currencies including the dollar, euro and yen," he added.

Under the system, each currency in the basket would be given a weighting based on trade transactions between the countries and other factors.

Thailand, Singapore, and Indonesia already operate managed floats, the Philippines does not have an open capital account, while Malaysia, Hong Kong and China have fixed exchange rates.

He said such a system could be particularly suitable for members of the Association of Southeast Asian Nations (ASEAN).

ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

ASEAN members recently struck an accord with China, Japan and South Korea to establish a safety net, linking each others foreign exchange reserves.

Under the agreement, known as the Chiang Mai initiative, any member country would receive currency reserves support from fellow members should it encounter temporary balance of payments problems.

"I'm confident that the Chiang Mai Initiative will be an effective mechanism to handle the future currency and financial contingencies in the region."

Japan, in May, signed agreements to set up currency swap deals with Thailand, South Korea and Malaysia, and Kuroda expected more to follow.

"We hope to soon conclude our negotiations with the Philippines and China, and with Singapore and Indonesia we have not yet started negotiations but I hope that we would soon," Kuroda told Reuters.

He saw no danger of a currency crisis this year as most countries in the region were running balance of payments surpluses, had reduced their short term debt exposure and increased their reserves.