Japanese currency set to go global
Jiwamol Kanoksilp and Thanong Khanthong look at the internationalisation of the yen.
Apart from augmenting Japan's regional leadership role, the US$30-billion Miyazawa Plan to aid Asia is also going to lead to the internationalisation of the yen.
When the crisis-hit countries in this region borrow money from the Miyazawa Plan, they will use the yen to reconstruct their crisis-stricken economies. ''That will be a start of the internationalisation of the yen or a stimulation for Asia to use the yen as a means of transactions,'' said Dr Olarn Chaipravat, the president of Siam Commercial Bank.
In early December Olarn will travel to Japan to testify to the Japanese authorities over how the yen can be boosted to play a greater role in this region. Olarn said the money from the Miyazawa Plan can either be used to purchase Japanese goods or as foreign exchange reserve.
''This will lead the Bank of Thailand to convert its assets into yen-denominated assets to match the increase in yen reserves,'' Olarn said.
During the pre-crisis, the US dollar reigned supreme as the international currency, with Thailand and other regional economies pegging their currencies to it. The dollar component in the Bank of Thailand's basket of currencies was about 80 per cent, compared to 10-11 per cent for the Japanese yen.
The weakness of the US dollar over the past decade helped fuel Thai and Asian exports because the Thai baht and other regional currencies, pegged to the US dollar, also weakened vis-a-vis other major currencies.
The wheel of fortune changed dramatically with the appreciation of the US dollar since mid-1995. The baht and other regional currencies came under pressure because they rose against the yen and undermined the competitiveness of the exports of their home countries.
Critics now say one of the major cause of the Asia crisis was the fact that the Asian economies pegged their currencies to the US dollar, whose appreciation made the peg unsustainable. The baht, pegged to the dollar since 1984, collapsed in 1997 on the weight of the attack and the subsequent capital outflow.
The fall of Thailand and the regional economies prompted Japan to act for fear that its huge investment in the region would also melt down. Last year Japan floated the idea of setting up a US$100-billion fund to help bail out Asia, but the proposal was shot down by the United States out of fear that it could undermine the US and the International Monetary Fund's supremacy in the international monetary system.
With the deepening of the crisis in Asia, Japan won a half-hearted approval from the US to launch the Miyazawa Plan. Tarrin Nimmanahaeminda, the Thai finance minister, has gone to Tokyo to hold talks with Japanese officials over how Thailand could tap the money from this package to revitalise its economy.
Once Thailand takes delivery of money from the Miyazawa Plan, its foreign exchange reserves will carry more yen assets, thereby reducing the weighting of the US dollar. With the introduction of the euro next year, the role of the US dollar is expected to be further undercut.
''This means that the concept of the yen zone has been brought back to life,'' said Olarn.
However, treasury analysts said Thailand is not likely to rush to embrace the yen as the dominant currency of reserves, for the most appropriate way to manage the foreign exchange policy is to follow the trade-weighted index, which really reflects Thailand's trade with its trading partners.
''I think [the officials] are now monitoring the baht closely on the trade-weighted basis because we often hear them comment that the strengthening of the baht recently is not undermining Thailand's competitiveness when compared to the neighbouring countries,'' said a treasury expert.
Moreover, if the yen is to play a more dominant role in international transactions, the foreign and local banks in Thailand must start to quote the yen-baht trading in the interbank market, he added.
At present, there is no direct yen/baht quote among the banks. If there is a need for a yen/baht quote, dealers will look at the dollar/yen rate and dollar/baht rate before crossing them into yen/baht rate.
''It might take a while before the market for the yen develops. Eventually we might see it. But at first there must be yen/baht dealings in the interbank market,'' said the treasury expert.