IMF official favors Asia currency basket

IMF official favors Asia currency basket

PHILADELPHIA (Reuters): Japan's representative at the International Monetary Fund said Friday that he believed troubled Asian countries could set the stage for economic recovery by pegging their exchange rates to a basket of regional currencies.

IMF executive director for Japan Yukio Yoshimura, expressing only his personal opinion, said currency boards like one being considered by Indonesia work best in economies suffering from hyper-inflation and managed by governments with the political will to confront the harsh economic consequences.

"Many Asian countries have not satisfied these types of conditions," he told Reuters.

Yoshimura said Southeast Asian countries have talked about setting up a currency basket based on the Singapore dollar.

"Discussions towards that arrangement would be very helpful not only in stabilizing the currencies but in helping them to regain economic growth," he said in an interview.

Yoshimura was in Philadelphia to speak at a conference on Asia's economic woes sponsored by the University of Pennsylvania's Wharton School of business. Despite his opinion about currency boards, he told the conference that free-floating exchange rates by a majority of Asian countries could not be sustained over the medium term.

Such a system would affect capital and trade flows, "and the end could be competitive devaluations in the region," he said.

The threat made the idea of a currency basket a viable option for Asia. "In that case, the share of the yen should be substantial, reflecting the important role of Japan as a regional trading partner," he said.

The Japanese official told his audience that recent discussions about regional financial surveillance in Asia could help to narrow the gap between orthodox IMF macroeconomic policy and the so-called Asian economic model.

"In fact, the gap has already narrowed as a result of the Asian crisis. Many Asian countries have acknowledged the need to tighten macroeconomic policy to defend currencies and have agreed to reform the relationship between governments, banks and businesses," Yoshimura said.

Meanwhile, he said Japan must move back to a course of stable economic growth if it is to stabilize the wider Asian region. He also called for Big Bang financial markets reforms to move ahead in Tokyo.