(Nikkei: March 19, 2015 – p. 2)
By Ryo Nakamura, Kentaro Ogura
Economic diplomacy in Asia over currencies is at a critical juncture. While Japan and the ROK have let their currency swap agreement expire, the UK, France, Germany, and Italy have announced their participation in the China-led Asian Infrastructure Investment Bank (AIIB) to be launched this year. It now appears that the time-honored Japan-U.S. partnership has not been fully capable of dealing with China’s increasing presence.
Act one of this change was the termination of the Japan-ROK currency swap accord in February. The comfort women issue and other political problems were, no doubt, behind the expiration of this 14-year arrangement. However, it is also a fact that the bilateral accord had become so unimportant that deterioration of diplomatic relations resulted in its termination.
While the ROK ended its agreement with Japan, it extended a similar accord with China, its leading trading partner. The Chinese yuan is increasingly being used in trade settlement, so a currency swap agreement with China has become more beneficial for the ROK and other countries.
The ratio of yuan-denominated international trade settlement and money transfers had grown to 2.17% in December 2014, increasing by 1.5 percentage points in less than two years, and the yuan is now fifth in importance from its previous 13th place in such transactions, with the possibility of overtaking the Japanese yen eventually.
The second act of this drama comprises the developments relating to the AIIB initiative. With the UK announcing its participation, there is now a widening crack in the supposed solidarity of the G7 nations.
At the root of these developments is the slow response of Japan and the U.S. to this process.
The Japan-ROK currency swap was one of the international financial safety nets created after the 1997 Asian monetary crisis. At that time, Japan had wanted to establish the Asian Monetary Fund (AMF) as an organization independent from the International Monetary Fund (IMF), which had been slow in providing financial assistance to the Asian countries. However, this initiative failed due to fierce resistance from the U.S., which was worried that this might undermine its influence in Asia.
The aftereffects of what happened at that time still persist. The bilateral currency swap agreements Japan signed so far with other Asian countries authorize the use of only 30% of the total amount at the discretion of the two countries. The rest is premised on IMF aid, so these agreements are not very useful.
Japan signed such accords with Thailand and Malaysia in May 2013, but in reality, they have not been implemented after nearly two years. It is believed that this is because both countries think that the agreement with Japan will not be very useful in an actual crisis.
Independence from the IMF, which is unfamiliar with the situation in Asia, will be essential for making the currency swaps more user-friendly. However, a Japanese government source notes that this may result again in heightened tension with the U.S. As the two countries dilly-dally, the yuan’s sphere of influence is expanding with China working for raising the international status of its currency.
Japan and the U.S. have also failed to cooperate properly in their response to the AIIB initiative.
The Asian Development Bank (ADB) founded in 1966 under the leadership of Japan and the U.S. already exists as an international organization providing funds for infrastructure construction in Asia. The ADB will increase its loans by 50% from 2017. However, it will not increase its capital. It will merely combine current funds on hand with funds for low-income nations to come up with the needed capital.
Japan and the U.S. have had the longstanding fear that if China becomes a bigger donor through a capital injection, it will have a bigger say in the ADB. As these two countries remain undecided on a capital increase in their desire to prevent China’s stronger presence, the founding of the AIIB is fast approaching toward the end of this year.
When asked about Japan’s participation in the AIIB at his news conference on March 17, Finance Minister Taro Aso indicated that the G7 should discuss this question.
For sure, the G7 need to discuss this issue. However, both Japan and the U.S., the G7’s two key players in Asian economic diplomacy, have yet to come up with a new strategy adapting to the change of the times. Unless they are able to do so, they are likely to lag behind again in this issue. (Slightly abridged)