Japan eyes more FX swap deals with RI, S'pore

Japan eyes more FX swap deals with RI, S'pore

HONOLULU (Reuters): Japan on Thursday said it wants to strike currency swap deals with Singapore, and later Indonesia, as part of the plan for an Asia-wide safety network that it sees as prelude to an "Asian Monetary Fund" (AMF).

Senior Vice Finance Minister Seiichiro Murakami said he hoped Wednesday's announcement of bilateral swap agreements totaling US$6 billion with Thailand, South Korea and Malaysia would help foster talks among other Asian nations to develop the web.

Japanese officials also said on Wednesday they expect talks with China and the Philippines to conclude by the summer.

"As next candidates, there are Indonesia and Singapore," Haruhiko Kuroda, vice finance minister for international affairs, told reporters at the Asian Development Bank's annual meeting in Honolulu, where the swap deals were revealed.

The proposed network, known as the Chiang Mai Initiative (CMI), is aimed at preventing a repeat of 1997-98 Asian financial crisis by offering vulnerable countries the ability to draw on the web of swap deals in times of crisis or fund shortage.

"I think we will eventually start negotiations with Singapore without any problem," Kuroda said, adding that Indonesia may not be ready for talks yet given its uncertain economic and political situation.

Murakami met with Indonesia's Finance Minister Prijadi Praptosuhardjo on Thursday, but there was no specific reference to the CMI at the meeting.

Singapore, which has the largest foreign reserves among ASEAN nations, appeared to be somewhat indifferent to the scheme, but Tokyo is eager to change Singapore's mind.

The Japanese deals, however, are only the beginning of the Tokyo-led plan that aims to link the international reserves of the 10-member Association of Southeast Asian Nations, through bilateral pacts, with the China, Japan and South Korea (ASEAN+3).

"South Korea and China are working hard, and I expect we will have good results not in the long-distant future," Murakami told reporters.

Some analysts were skeptical about the CMI's effectiveness, believing the deals were too small and would only encourage the speculation it was designed to protect currencies from.

"Speculators will be delighted, no doubt, at the enlarged pool of funds available for squandering by central banks," Deutsche Bank said in its Asia Economics Daily.

"A couple of billion dollars might conceivably stave off devaluation by a few days, but if reserves ever fall to levels where $2 billion makes a significant difference in the central bank's defenses, devaluation is probably inevitable," it added.

The CMI scheme is seen as a move towards more permanent regional monetary integration, and the possibility of an AMF.

Japan's initial 1997 proposal was quickly quashed by Washington and Europe, which said it would undermine reforms advocated by the International Monetary Fund (IMF).

Murakami hoped the discussion on regional financial cooperation would head towards the creation of an AMF, but acknowledged there would be a long road ahead.

"I personally think we should bring the issue toward that direction. But it would be a step-by-step talk for the future with other countries, such as China, involved," he said.

China has shifted significantly from opposing the AMF proposal to backing to the CMI, which maintains a link to IMF-supervised reform and surveillance programs.

Kuroda, one of the key forces behind the AMF proposal, has said he would never give up on it, but also stressed that it was not Japan's imminent policy goal and Tokyo wants to promote regional cooperation through the CMI for now.

He acknowledged on Thursday that there is still a wide gap over the issue of the regional surveillance, which would be indispensable if Asia wants to set up a regional monetary fund.

But he said an agreement by ASEAN+3 finance ministers on Wednesday to set up "a study group to examine ways of enhancing the effectiveness of our economic reviews and policy dialog was a step forward."