Introduction
1. Good morning, Deputy Governor Nishimura, Governor José Darío Uribe, Peru Central Bank President Julio Velarde, distinguished guests, ladies and gentlemen.
2. It is a great honor and pleasure to be here this morning at this seminar on regional financial cooperation, jointly organized by the Bank of Japan (BOJ) and CEMLA. I have long participated in the work of regional financial co-operation and have travelled extensively to Latin American countries for that purpose. It is no wonder that I feel very much at home here this morning at the BOJ-CEMLA Seminar on Regional Financial Cooperation.
3. I thank the organizers for inviting me to this seminar and would especially like to welcome colleagues from Latin America and others who travelled far and wide to join us here in Tokyo.
Financial Cooperation in Asia and AMRO
4. Some of you may not be familiar with AMRO as it is still a new organization. Please allow me to provide a brief background to AMRO, which was in fact established in May 2011 as the result of more than 10 years of financial cooperation in Asia.
5. Financial cooperation in Asia developed during the aftermath of the Asian financial crisis in 1997 and 1998, when authorities of ASEAN+3, which includes 10 ASEAN countries, China, Japan and Korea, realized that it would be crucial to enhance East Asia’s self-help financial support mechanism.
6. In May 2000 in Chiang Mai, Thailand, ASEAN+3 Finance Ministers agreed to establish the “Chiang Mai Initiative (CMI)” as a regional financing facility to supplement then-existing international facilities. The CMI was designed as a network of bilateral swap arrangements between ASEAN countries and plus-3 economies (being China, Japan and Korea).
7. Over the last 10 years, the CMI continued to evolve and eventually transitioned into a new stage in March 2010 when the Chiang Mai Initiative Multilateralization Agreement (CMIM Agreement) came into effect. With the arrival of the CMIM Agreement, the regional financing facility became a shared multilateral swap arrangement among all members, with a collective decision-making process. In short, there would be one agreement among 14 members, with each member assuming the role of both provider and borrower of US dollar. I believe this arrangement promotes discipline and has helped strengthen the framework.
8. Financial co-operation among ASEAN+3 countries reached another important milestone last year with the establishment of AMRO (ASEAN+3 Macroeconomic Research Office) as the surveillance unit of the CMIM. AMRO’s establishment was decided in tandem with the CMIM agreement, with the view of strengthening the surveillance mechanism in the region and ensuring prompt activation and smooth operation of the CMIM.
9. Today AMRO is just over a year old with a total of 21 staff, 12 of which are economists.
10. With the global environment turning even more volatile in recent years, ASEAN+3 Finance Ministers and Central Bank Governors took precautionary measures to strengthen the CMIM further in May 2012 by doubling the size of the CMIM to US$240 billion and introducing a crisis prevention facility.
Merits and Shortcomings of the CMIM & AMRO
11. The CMIM has seen some notable developments over the years and is now equipped with more financial resources, its own surveillance unit and a new crisis-prevention function. Though not fully insulated from global financial developments and volatilities, East Asia is now better prepared against potentially adverse financial shocks than in 1997.
12. Despite these positive developments, financial cooperation in East Asia needs to be strengthened further. In particular, there is still room for improvement for the CMIM as well as AMRO in their function as the region’s financial safety-net mechanism.
13. The CMIM has not yet been used in a real crisis situation and its procedural and administrative aspects, in particular those relating to the crisis-prevention function, still need to be developed fully.
14. The CMIM’s surveillance unit, AMRO, is also at its initial stage of development and its surveillance capacity and expertise will need to be strengthened.
Why Is Independent and Effective Surveillance Important?
15. The importance of independent surveillance cannot be emphasized enough. I am convinced that in the coming years, ASEAN+3 authorities will implement creative measures to address the challenges and shortcomings mentioned, as part of continuous efforts to strengthen the regional financial safety net.
16. I would like to discuss a few issues related to macroeconomic and financial surveillance and share some of my thoughts on the importance of independent and effective surveillance. Among other things, there are three important reasons for this:
17. First, recent crises in advanced economies, in particular the global financial crisis and the Eurozone sovereign debt crisis, highlight the need for independent surveillance which is not influenced by political considerations. Independent surveillance, assessments and reporting procedures are critical means in detecting early signs of risks, thereby allowing preventive measures to be taken accordingly.
18. Second, recent crises also underline the interconnectedness of the global economy and thus the need for deeper analyses on the linkages between sectors and countries. Given the potential for financial sector movements to rapidly ignite and propagate risks leading to potential crises, effective financial sector surveillance is particularly critical.
19. Third, the introduction of the crisis prevention function in the CMIM framework will broaden AMRO’s role as the regional surveillance unit. Surveillance of member economies and their policies remain the main areas of focus, while global risk factors will also need to be monitored closely.
20. Here I would like to emphasize the importance of accurate, timely and transparent data. While the crises the world has seen so far may have stemmed from different causes and roots, many of them share a common trait related to problems with data. The recent Eurozone crisis is yet another global event demonstrating the importance of accurate data and the damage that could ensue without it. Although country-level data across the European Union was available on Eurostat, the data supplied by some of the peripheral Eurozone economies was inaccurate and misleading. If fiscal data for these peripheral economies had been correct and accurate, risks in the Eurozone could have been detected earlier and the extent of the crisis could possibly have been less severe.
The Case for Cooperation between Regional and Global Financial Safety Nets
21. Before I close, please allow me now to say a few words on the case for cooperation between regional and global financial safety nets. While our discussion so far focuses on the region’s financial safety net, it is also important to consider the relationship between regional and global financial safely nets. Even though regional financial cooperation initiatives have been ongoing over the last decade, active discussions on the relationship between regional and global financial safety nets are a very recent phenomenon, and only gained more prominence after the global crisis in 2008.
22. So what is the relationship between regional and global financial safety net? How are they interacting with each other? Are regional and global financial cooperation adequately coordinated? These are important questions, as rightly raised in this seminar.
23. I am aware that policy makers and economists may have differing views on this. Some still question the need for a regional financial safety net when there is already a global financial safety net. Some dismiss the global financial safety net because of its stigma. Others question the possibility for regional and international financial safety nets to complement one another.
24. I would like to draw your attention to one of the important features of the Eurozone sovereign debt crisis which will help shed some light on our discussion. These thoughts were shared by Deputy Governor Nishimura in his earlier remarks.
25. As you are well aware, the Eurozone sovereign debt crisis which started from some of the smaller economies in Europe has now resulted in the establishment of EFSF/ESM, the Eurozone’s regional financial safety net, in close cooperation with the IMF, the global financial safety net. Why did the Eurozone still have to resort to the global financial safety net after establishing the regional financial safety nets?
26. In my view, Eurozone authorities resorted to borrowing from the IMF to receive not only financial support but obtain credibility as well. Why is that? To understand this, we need to distinguish between a crisis stemming from external sources and a crisis from stemming from internal sources. If a crisis stems from external shocks, a country or region may only require liquidity support. However, if a crisis stems from internal weaknesses and problems, the country or region will not only require liquidity support but will also need to restore credibility to its economy, and this can only be provided via an external help. The Eurozone sovereign debt crisis was a crisis brought on by structural weaknesses within the Eurozone, such as the lack of competitiveness, weak external position and non-sustainable public finance. Accordingly, Eurozone economies in crisis needed to obtain credibility on its bailout programs and therefore sought help from the IMF in addition to receiving regional financial support.
27. In the same vein, should external shocks lead to a crisis in this region, the members of the CMIM may consider resolving it without support from the IMF. However, if the crisis stems from within the region, large amounts of liquidity support alone may not be sufficient to solve the situation. In this regard, it is important for there to be ongoing discussions and efforts in establishing a good model of co-operation between regional and global financial safety nets.
Closing Remarks
28. In today’s uncertain and interconnected world, it is becoming increasingly difficult to predict the direction and outcome of global economic developments. While the provision of liquidity by central banks of major economies has helped support the global economy somewhat, the ample global liquidity has also contributed to increased volatility in the capital markets. As such, authorities will need to be attentive and vigilant in managing capital flows which tend to be volatile and prone to sudden reversal in flows.
29. Under these circumstances, Asia and Latin America are becoming the drivers of global growth and the economies of both regions are becoming increasingly connected through growing trade and investment. Hence it is increasingly important to nurture closer cooperation between the two regions.
30. Once again, I would like to thank the Bank of Japan and CEMLA for inviting me to this seminar. Thank you very much for your attention.