Japan set to propose SE Asia initiative

Japan set to propose SE Asia initiative

TOKYO (Reuters): Japan is set to propose a fresh plan to ease the pain being suffered by Southeast Asian nations, while suggesting ways to control the rapid short-term capital flows that have devastated emerging market economies, government officials and analysts said on Tuesday.

Tokyo's new initiative to support Southeast Asia is expected to be announced at next week's annual meeting of the World Bank and International Monetary Fund (IMF) in Washington.

"The focus is now shifting to how (Japan) can help ease the immediate economic problems, such as the existing debt burden, of these nations," said a senior government official.

Tokyo is unlikely to revive the ambitious proposal it made last year at the same meeting -- to create a regional fund of up $100 billion to support crisis-hit Asian nations -- as the region's problems have now shifted, government sources said.

"The essence of the Asian economic problem has changed from last year, when the outbreak of currency crisis spurred rapid capital flight and then resulted in a current account imbalance," he added.

The current account problem has improved as capital flight from the region has abated, but "these nations are still in distress, since improvements in trade positions were mainly brought on by falling imports, not by rising exports," he said.

Government sources said Japan's proposals would include activating the regional debt market and promoting private direct investment into the region, while giving some investments government guarantees.

Already, Tokyo has announced that it will use trade insurance to guarantee loans made by private Japanese financial institutions to Southeast Asian nations to help them obtain funds to establish infrastructure.

The first case is likely to be a loan totaling 70 billion yen ($522 million) to Malaysia, in which Sumitomo Bank Ltd and Nomura Securities Co Ltd are involved.

The financing will enable Malaysia to raise funds at lower costs than when it directly taps capital markets.

Japan is also likely to express at the G-7 meeting the need to prevent foreign capital from flooding Asian nations, where there are varying degrees of economic development.

Finance Minister Kiichi Miyazawa said on Tuesday he wanted to discuss the idea of putting controls on short-term capital movements with his deputy Eisuke Sakakibara.

He suggested he would consider middle ground between the unbridled free movement of short-term capital, which has called into question the role of giant hedge funds, and the drastic capital and currency controls recently implemented by Malaysian Prime Minister Mahathir Mohamad.

Akira Nagashima, a former deputy governor of the Bank of Japan and now executive adviser to Tokio Marine and Fire Insurance Co Ltd, said there was a growing international view among developed nations that "moderate" restrictions on capital inflow into emerging market economies would be appropriate.

"I understand that Japan will take such a stance," he told Reuters on Tuesday. "And there is a chance that this view will gather momentum, particularly for developing nations whose financial markets are underdeveloped."