For more than two-and-a-half years since the Asian currency crisis started in July of 1997, various discussions have continued and some ideas have been proposed in order to prevent a recurrence of the crisis. One of these representative proposals is the "Currency Basket Peg System," proposed by Japan's Minister of Finance, Mr. Kiichi Miyazawa, at the Asia Pacific Economic Co-operation (APEC) Finance Ministerial Meeting in the spring of 1999.

　However, even if the currency basket peg system is the most suitable policy measure for East Asian countries, the monetary authorities in these countries will likely face difficulties when implementation is to take place. One of the biggest obstacles is the fact that the yen has yet to be internationalized at all. This internationalization is indispensable to establish an environment for Asia to adopt the optimum currency system.

Crisis caused by the U.S. dollar peg system

　The currency basket peg system is a mechanism whereby a home currency is fixed to a basket of currencies comprising some of the major currencies such as the U.S. dollar and Japanese yen. On the other hand, Asian countries which faced the currency crisis had de facto adopted a dollar peg system. Thailand, the epicenter of the Asian currency crisis, had formally announced after 1984 that it adopted a currency basket peg system. However, it had placed the most emphasis on how to stabilize the Thai baht rate against the U.S. dollar.

　In the dollar peg system, changes in the yen/dollar rate cause fluctuations in the countries' currencies. Particularly East Asian countries, which have strong trade relations with Japan, are affected significantly. Changes in a country's exchange rate against the yen magnify trade account fluctuations through effective exchange rate changes (an exchange rate of a home currency against the weighted average of several countries' currencies in terms of the amount of trade).

　As most East Asian countries' currencies appreciated against the yen, due to the yen's depreciation against the U.S. dollar, East Asian countries' manufactured goods lost their price competitiveness and their export growth rate was reduced. Such things became a very heavy blow for export-oriented countries' economies and became one of the causes of the currency crisis.

　In the joint research with Dr. Takatoshi Ito, a former Professor of Hitotsubashi University (Deputy Vice Minister for International Affairs, Ministry of Finance), and Dr. Yuri Sasaki, Associate Professor at Takachiho University, we tried to calculate the most optimal share for the dollar and yen in the composition of a currency basket to which major Asian currencies should be pegged. We considered not only the share of trade but also the trade responsiveness to exchange rates.

　We found that, despite some differences between countries, the most optimal dollar share is from 50% to 70%, while the optimal yen share is 30% - 50%. This means that a basket currency peg policy system with a larger share of the yen is more desirable from a viewpoint of crisis prevention, compared with the dollar peg system adopted prior to the crisis.

Inevitable risk under separate implementation

　The most important point in the discussion of a currency basket peg system is the objective of monetary authorities in pursuing their policies. In order to stabilize fluctuations in trade accounts and, in turn, GDP, it will be necessary for the monetary authorities to pay attention to the exchange rates of their trade partners.

　However, as a practical matter, the main interest of those authorities is how much they can minimize their currency risk in domestic and foreign trade, direct investment and international financial transactions. As a result, exchange rate policies in East Asian countries have been managed in order to stabilize exchange rates of their home currencies against the dollar, which is used for denomination and settlement. Still, at present, China, Hong Kong and Malaysia maintain their dollar peg systems from the aforementioned standpoints.

　Listening to the views of the authorities in China, Malaysia, and Thailand, which adopted the pegging system to the dollar in practical terms, they believe that the confidence toward their currency is enhanced through pegging to the greenback, which is the key currency in the world.

　There is another problem. If a country adopts a different exchange rate policy among the East Asian countries, it might be disadvantageous to their country in terms of price competitiveness due to changes in market rates.

　In order to avoid such a risk, if adoption of an optimal exchange rate policy is desirable, the biggest challenge to any country will be a "coordination failure." Currency policy cooperation among East Asian countries will be important in solving this problem.

　Although Thailand shifted to a managed float system consequent to the currency crisis, it has been maintaining a cautious position about shifting to a system of pegging the baht to a currency basket. Thai officials might have some concerns that it would be difficult to control the rate and so they keep waiting and seeing other countries' movements. Obviously, international coordination is indispensable.

　Furthermore, another problem such countries are confronted with is the small role of the yen as an international currency. If the yen were used as the international currency of East Asia, interest in the yen in exchange rate policy would have been enhanced. With the internationalization of the yen, a smooth shift to a currency basket pegging system, which includes the yen, away from the exchange rate policy of pegging only the U.S. dollar, could be realized.

　Internationalization of the yen is necessary for these countries to adopt the most optimal currency policy in order to prevent a recurrence of the crisis.

Private sector's choice is key

　The preconditions for the internationalization of the yen have been set by government officials up until the present day. It is a necessary condition, but not sufficient. The position of international currencies depends not only on the stable value of currencies, but also the convenience of settlements within the international economy. Such convenience is influenced by network externalities, the logic that a currency is more convenient the more it is used by people for settlement purposes. For this reason, in order to realize internationalization of the yen, it is critical for private companies and banks to use the yen in practical matters.

　How to enhance the function of the yen as an international currency depends on how other countries use the yen. In particular, how Japanese companies and financial institutions deal with the internationalization of the yen will be important.