Japan wary of regional currency safety net in Asia

Japan wary of regional currency safety net in Asia

TOKYO (Reuter): Japan is cautious about joining a "safety net" in Asia to protect regional currencies from speculative attacks, monetary officials said.

The reason is that it has a bigger commitment to a safety net run on a global basis, they said.

A senior official at the Ministry of Finance told Reuters: "It's a bit premature to give serious thought to a regional safety net when a global plan to beef up a war chest to counter an economic crisis is not even finalized."

Japan, the world's largest foreign reserves holder, has been supporting a plan to strengthen a global safety net by doubling the amount of emergency resources available to the International Monetary Fund (IMF), he said Thursday.

The plan, which would run parallel to the IMF's existing US$25 billion General Agreements to Borrow facility, is expected to be finalized at an IMF meeting in April.

A senior monetary official said: "The plan is in its final, sensitive stage."

But some Asian economies have decided to create their own, unconvinced they could benefit from a global facility led by a Western institution such as the IMF. They also feel they would be unlikely to have any real influence on decision-making in the IMF facility, analysts said.

In November, central banks and monetary authorities from Australia, Hong Kong, Indonesia, Malaysia and Thailand signed an agreement which would allow them to borrow U.S. Treasury securities from each other during a currency crisis.

So far, Japan has been content to be just an observer of the so-called Asian "repo pact". Under the agreement, Asian central banks can borrow U.S. bonds to use as collateral for funds to combat speculative moves against their currencies.

Apart from Japan's commitment to a global safety net, there are other reasons behind Tokyo's hesitation to back a regional emergency network, analysts said.

C.H. Kwan, a senior economist at the Center for Policy Research of Nomura Research Institute Ltd, said: "If Japan joined the deal, it would be as a country that provides a benefit rather than one which receives one, which isn't very cost-efficient. But not joining the deal means Japan also runs the risk of being bypassed in the future by other Asian economies in the field of regional financial cooperation."

Ineffective

Another monetary official said the idea of an Asia-only grouping which excluded the United States was ineffective because many Asian currencies are pegged to the U.S. dollar, which is the key currency in the region.

As a more comprehensive approach to an Asian monetary grouping, Reserve Bank of Australia Governor Bernie Fraser has called for a new regional institution to promote coordination among Asian central banks that would be modeled on the Swiss- based Bank for International Settlements (BIS).

Fraser said the main functions of an Asian BIS would be to share information and experience, and to provide an emergency support mechanism as well as supervision and surveillance. The first monetary official said: "The idea of setting up a regional institution in Asia is interesting and worth consideration."

The Bank of Japan is in favor of exchanging more information on the concept, he said, but he stopped short of backing the idea that it provide emergency liquidity. "In the long run, global and regional networks working against liquidity problems must supplement each other," he said.

Japan's external reserves stood at a record $182.84 billion at the end of January, the Finance Ministry said on Thursday. Its participation is needed for both an Asian currency pact or an Asian central bank to be a success, analysts said.