Reappraising Japan’s Proposal for an Asian Monetary Fund in 1997
Fabio Masini
Abstract
At the Annual Meeting of the World Bank and the IMF in Hong Kong on September 21st, 1997, soon after the
collapse of the Thai baht in July and the subsequent outburst of the East-Asian currency crisis, the Japanese
Finance Minister Hiroshi Mitsuzuka officially proposed the creation of a $100 billion Asian Monetary Fund.
Surprisingly, the proposal excluded any involvement from the USA and the IMF, causing their violent
negative reaction and veto. Until then, Japan had always involved the USA in Asian regional integration.
Although such initiative would radically change the course of regional financial integration in East-Asia and
the global balance of power in the forthcoming decades, it received attention only by very specialized
authors, who concentrated on single, fragmented explanations of an issue that was multifaceted and complex.
The aim of this paper is to reappraise this affair and provide a comprehensive picture of the relevant issues at
stake, reconstructing the intertwined relationships between – and highlighting the relative role of – economic
theories, financial dynamics, and political/strategic considerations.
JEL codes
B22, B29, E42, F02, F20, F33, F42, F50, H12
Keywords
East-Asian crisis, Asian Monetary Fund, IMF, Japan
Introduction
At the Annual Meeting of the World Bank and the IMF in Hong Kong on Sunday
September 21st, 19971, soon after the collapse of the Thai baht in July and the subsequent
outburst of the East-Asian currency crisis, the Japanese Finance Minister Hiroshi
Mitsuzuka proposed the creation of a $100 billion Asian Monetary Fund (AMF), financed
half by Japan and half by Taiwan, Singapore, Hong Kong, and China. The proposal
followed a less detailed and unofficial suggestion circulated on September 10th.
Surprisingly, the proposal excluded any involvement from the USA (who discovered
about it only on September 14th) and the IMF, causing violent negative reactions, which
resulted in a de facto political veto. As Amyx (2002, 1-2) noted: “this move drew a great
deal of attention and signaled an important departure in both substance and style from
Japan’s prior regional institution-building initiatives that included the United States”.
Until then, Japan had always involved the USA in Asian regional integration (Lee 2006,
1
A few weeks earlier, Hong Kong had formally returned under the sovereignty of China, after over one
century and a half of British dominance. The meeting was therefore held in the territory of China: a symbolic
but significant step. Ironically, on that same day and during the storm, an implausible session had been
organized at the IMF and WB Annual Meeting titled South Asia: The Next Miracle? On that Sunday
afternoon, at 15:00 was also scheduled the Per Jacobson lecture by Joseph Yam (JP Chief Executive, Hong
Kong Monetary Authority) on Asian Monetary Cooperation. In that speech, although acknowledging the
extraordinary effort from multilateral institutions such the IMF and BIS to provide financial assistance, he
observed: “some in this region have felt that such support and guidance, particularly from the multilateral
institutions, have been less forthcoming than they would have liked, comparing for example the support given
to Thailand with Mexico. They also feel that the special circumstances and interests of economies in the
region have not been adequately taken into account. Nor do their voices count for enough”.
1
340), and in the first weeks of the crisis Japan had supported the IMF in its scheme for
short-term (conditional) financial assistance to the region (ibidem).
Why did Japan’s officials openly challenge the role of the IMF and the USA in tackling a
currency crisis in Asia? Eisuke Sakakibara (2001), Vice-Minister of Finance for
International Affairs in Japan during the crisis and major protagonist in the AMF
proposal, suggested this should be explained as a reaction to the aggressive behavior of
the Clinton administration against Japan in the previous years, instrumental to reducing
its export capacity via an undervalued dollar against the yen. A plausible explanation,
given Japan efforts during the previous years to emerge as a dominant regional power in
East Asia.
An explanation, though, that seems to neglect the role of other major triggering factors,
such as the financial crisis that had been hitting Japan already before the East-Asian
currency crisis (that cannot be just a matter of uncorrelated coincidence). Japan’s
dominance, in short, was being challenged already before the currency crisis (and the
AMF proposal) emerged, not because of its failed attempt and/or the crisis itself. Another
intriguing question, given the subsequent evolution of the balance of power and regional
integration in South-East Asia, is if the behavior of China in this affair can be neglected.
What is mostly surprising in this event is that, although it radically changed the course of
regional integration in South-East Asia and the global balance of power in the
forthcoming decades, it received attention only by very specialized authors, who
concentrated on single, fragmented explanations of an issue that was, by its nature,
multifaceted and complex.
Scholars in international relations stressed the role played by the evolving USA-Japan
relations (Narine 2003). The journalist Paul Blustein (2003) focused on the role of the
above-mentioned Sakakibara as an ideological opponent to the neoliberal wave imposed
by Washington in the Nineties. Scholars in financial issues underlined the role that the
failure of the banking system (in Japan) and its sudden depreciation since 1995 played
both in triggering the crisis and in the making of the Japanese proposal (Ito 1999).
Economists stressed the role of supply and demand mismatch (overinvestment) and
subsequent trade divergences (Sohn 2004) due to currency misalignments (basically the
peg of the South-Asian currencies to the US dollar) during the previous years (Tobin
1998); Roubini (2009, 84) underlined “rollover/liquidity risks […], lack of risk sharing
and rigid external debt payment structures”; and Stiglitz (2001) explained the crisis as the
outcome of the USA strategic behavior to force conditional changes, through the IMF,
that would make such countries more vulnerable and exposed to US capital penetration in
their economies; hence the need for a regional safety net. That both the IMF and USA felt
as a threat (Stiglitz 2002, 112ff)
Each of these narratives, although providing convincing rationales for both the emergence
of the crisis and the Japanese suggestion concerning an AMF, neglect the role of other
features and lack a general framework, that should include geopolitical and strategic
considerations, trade wars, the role of each major actor in regional financial assistance
(IMF included), different approaches to capitalism and the role of public authorities in the
economy, previous crises such as Mexico, the role of the parallel process towards
monetary integration in Europe.
The aim of this paper is to reappraise this affair and provide a comprehensive picture of
the relevant issues at stake, reconstructing the intertwined relationships between – and
2
highlighting the relative role of – economic theories, financial dynamics, and
political/strategic considerations.
We shall follow a chronological order, first enquiring into the evolving international
economic role of both Japan and the USA during the late 1980s and 1990s, with special
reference to the East-Asian region and the different models and concepts of the role of
economic policy and public intervention in the economy, including some reference to the
evolving Japan-specific banking crisis that preceded the East-Asian currency crisis (first
section). We will then detail the evolving events that led to the proposal and its dismissal
(second section), before we observe the follow-up of financial integration in the area
(third section).
1. The building up of systemic problems
Attempts at regional cooperation and integration in South-East Asia had a long history,
even without direct involvement of the USA and the IMF. In 1947 a United Nations
commission called ECAFE (Economic Commission for Asia and the Far East) was
established, along with one for Europe (UNECE) and one for Latin America (ECLAC,
better known as CEPAL, from the Spanish and Portuguese acronym). In 1950, a forum
for discussion among central bankers (called SEANZA, from the participating countries:
South-East Asia, New Zealand, and Australia) was created, aiming at providing training
on financial supervision and transnational, regional cooperation. Research was also the
focus of the following initiative, taken in 1966 with the creation of SEACEN (an
acronym for Southeast Asian Central Banks), based in Kuala Lumpur.
In the meanwhile, an initiative had been taken in 1960 in Bangkok to strengthen SouthEast Asian cooperation (Ibrahim 1961, 1), which would lead in 1963 to the first
Conference on East-Asian Cooperation that tried “to implement two schemes
simultaneously, namely, (a) ECAFE trade liberalization and expansion scheme, and (b)
ECAFE monetary co-operation scheme, which comprises (i) the Asian Reserve Bank and
(ii) the Asian Clearing Union” (Lee 1973, 1). While trade liberalization proceeded with
the establishment in 1967, in Bangkok again, of the ASEAN (the Association of SouthEast Asian Nations), that meant to implement regional integration along similar lines to
the ones adopted in Europe, mainly targeted to the creation of a common market, the
second scheme (a clearing union) was systematically neglected.
Just before the collapse of the Bretton Woods system in 1971, Robert Triffin and Pierre
Uri strongly advocated “a gradual shaping-up of an Asian or ECAFE Reserve System”
(Triffin 1969, 243), which should be pooling 10% of the reserve assets of each
participating country in the form of gold, foreign currencies and SDRs to provide
financial assistance in case of balance of payments disequilibria, leaving the US and the
IMF out. While before the end of the dollar-exchange standard such proposals were
tolerated (if not openly supported) by both the US and IMF, that were de jure leading the
international monetary system, after 1971 the USA had to counter every attack to their
hegemony in the monetary and financial field2 which was, in turn, key to their political
hegemony worldwide. During the floating of the 1970s (precisely: in 1977): “the ASEAN
2
This is precisely what systematically happened in the following decades, such as in 1975, when the OPEC
countries discussed whether to be paid in SDRs instead of dollars and the US managed to impose the use of
dollars, in exchange for the US engagement in ensuring security in the area.
3
countries had agreed to create a network of short-term bilateral swap agreements under
which each ASEAN country could obtain U.S. dollars in exchange for its own national
currency. A swap could last for no more than three months but could be renewed for three
more months. As the amounts involved were small, however, the swaps were rarely
activated and were not used at all during the Asian crisis” (Kenen and Meade 2008, 154;
see also Rhee, Sumulong and Vallée 2013).
After the tightening of monetary policy by Volcker in the early 1980s, the Plaza Accord
in 1985 led to a devaluation of the dollar against most other countries (DM, GBP, Yen) of
about 50%. The growth of East-Asian currencies, pegged to a devaluating dollar, was
partially accompanied by Japan (Goldar and Ishigami 1999), as “the appreciation of the
yen after 1985 pushed many Japanese firms to establish lower cost production bases
within the region” (Thomsen 1999, 12). At least until the Louvre Accord reversed the
currencies dynamic in 1987, when agreement was reached on halting the dollar
depreciation. In 1989 the APEC (Asia Pacific Economic Cooperation) was established to
ease trade and investment among the 18 member countries, and in February 1991 the
EMEAP (Executives’ Meeting of East Asia Pacific Central Banks) was created under
Japan’s initiative, to regain momentum for regional monetary integration.
Things started becoming more tensed in those early Nineties. The increasing relevance of
the US in the East-Asian economic growth during the 1990s is key to understanding its
continued explosive development. The USA had been providing fresh funds for direct
investments in South Korea, Malaysia, Singapore, Taiwan, Thailand, Hong Kong,
Indonesia, and the Philippines. US’s FDIs in the area rose from $29.9bn to $95.5bn (more
than three times) in five years between 1990 and 1995 (JETRO, Japan External Trade
Organization on OECD data, 1997; see table below). In the same period, Japan’s FDIs
declined from $48.1bn to $22.7bn, less than half. While the US took the leadership in
East-Asian FDIs, the relative economic and political importance of the two countries in
the region changed accordingly.
According to Kindleberger (1969), FDIs provide an optimal allocation of resources,
relocating them to places where there is some competitive advantage compared to
domestic investment. In the case of East-Asia, the key feature was the low labor cost.
Nevertheless, it is difficult not to underline the strategic importance of FDIs.
Multinational corporations usually make FDIs according also to strategic considerations
4
and alliances, not necessarily driven only by cost-reducing and profit-maximizing
considerations. Furthermore, without a favorable institutional and political setting, FDIs
become risky; and a comprehensive cost-benefit analysis might assess that costs prevail
over benefits.
While European integration was being shaken by speculative attacks – with the
emergence of Germany as the rule-setter of monetary integration – Kwan (1993) was
strongly advocating the establishment of an Asia-Pacific “yen bloc”3. He provided
evidence of the increasing interdependence among Asia-Pacific countries, suggesting the
need for a hegemonic role of the (then) most important currency, the Japanese yen.
During the 1990s, nevertheless, the Asian currencies still pegged the US dollar, which
had been rapidly appreciating against the yen since 1995, mostly to stabilize the domestic
value of their dollar-denominated debt.
The narrative of the yen bloc was therefore spreading in Japan (and elsewhere in the
region) when its external hegemonic role in the area was being challenged by its internal
financial flaws and by an aggressive USA exchange rate setting. It is doubtful whether
Japan promptly understood and anticipated such radical change, although according to
Murphy (2011) Japan not only understood this, but eased such process of hegemonic
dominance of the USA in the area.
In any case, Japanese exports increased; and East-Asian exports to Japan, their most
relevant market, dramatically decreased. Intra-Asian balance of payments disequilibria
started becoming worrisome, pressing for a devaluation of all East-Asian currencies
against the yen, which was nevertheless resisted due to the dollar peg. The result was that
“by early 1997, the Asian Tiger economies were confronted with a choice: (1) do nothing,
and watch their exports become much less competitive as the US dollar appreciated but
be better able to pay their US dollar–denominated debts or (2) break the peg to the US
dollar, devalue their currencies, and resume their export growth” (Rimkus 2016). This
also implies that, in this latter event, their economies, while recovering competitiveness,
would see their US dollar–denominated obligations become more costly. As (Rimkus
2016) argues: “the currency markets astutely sensed the dilemma and, despite official
pegs to the dollar, began selling the domestic Asian currencies”.
In this inherently unstable framework, where the dollar and the yen floated in the market
and Asian currencies rigidly followed the dollar, a major crisis in the Japanese banking
system burst out, soon before the currency crisis. The November 1997 banking crisis that
saw the collapse of a few major financial institutions in Japan (suggesting that it might
have been triggered by the currency crisis) had therefore its roots in what took shape
before the currency crisis of July, not as a consequence of it. What had happened in the
Japanese banking system? Kanaya and Woo (2000, 5) suggest that relaxation of interest
rate controls and capital market deregulation may explain the skyrocketing performance
of the stock exchange and the asset bubble during the 1980s.
Private agents, especially in the banking sector, were largely convinced – encouraged by
the attitude of both the Treasury and the Bank of Japan (Nakaso 2001, 17) – that, in case
of financial stress, small businesses would be saved by greater ones, and that the latter
3
The reference to – and insistence on – the “yen bloc” was probably unfortunate, as it closely reminded
China of the proposals for a “yen bloc” to manage areas under Japan’s domination (included a major part of
China) just before and during WWII (Hunsberger 1938).
5
were too big to fail. The dramatic drop of both the Nikkei and real estate prices at the
beginning of the 1990s dramatically impacted on the balance sheets of many financial
institutions, later reflected in a significant downgrading by rating agencies. To protect
their margins, banks – especially weakly capitalized ones (Woo 1999) – further relaxed
credit conditions and extended the maturity of their lending, thus increasing systemic risk.
Instead of acknowledging the changing environment, banking institutions bet on stock
and real estate prices to rise again (Kanaya and Woo 2000, 22). An evolution that well
resembles the endogenous dynamics of crises highlighted by Minsky (1982).
Source: Macrotrends, Nikkei, https://www.macrotrends.net/2593/nikkei-225-index-historical-chart-data
As would be later the case with the US financial crisis originated in the sub-prime
mortgage sector in 2007-08, since 1992 Japanese mortgage companies were already in
deep trouble. A few of them were dissolved as early as in the Summer of 1995. At the end
of 1994 two credit cooperative were suspended. It was just the beginning of a landslide.
Public money was used to protect depositors, but regulators failed to change the
supervisory legislative framework. According to Nakaso (2001, 18) the Bank of Japan
was the first to realize (since 1993) that the problem deriving from a halt in the real estate
bubble might become a landslide for financial institutions, especially for those linked to
increasing non-performing loans, but was confronted with the risk that any move in
strengthening a safety net might signal systemic risks to the market, triggering a major
financial crisis.
This might help explaining the reason why Japan and USA had been trying to cooperate
in those years. This was rather manifest in the Mexican crisis, in which the USA found it
difficult to provide bailout funds. The FMI would need additional funds too, as had been
suggested by IMF Managing Director Michel Camdessus, who in early 19944 tried to
issue some tenth billion SDRs, clashing with the violent resistance from the US and
Germany, which ultimately brought to the decision to avoid new general allocations5.
4
Camdessus’s proposal came prior to the outburst of the Mexican crisis in December 1994, but after Mexican
government entering a new political (risky) path, with the assassination of the Presidential candidate Calosio
in Tijuana in March 1994, and the sharp rise in interest rates as risk premium on Treasury bonds. As is largely
known, the whole turmoil came to a sudden halt only one month later, when the US agreed a $50bn rescue
package jointly managed by the IMF, the G7, and the BIS.
5
As the German Horst Siebert made explicit in a workshop on the future of SDRs in 1996, the need for an
increase in reserves did not per sé justify the allocation of SDRs (Mussa, Boughton and Isard 1996, 101ff).
The point was mainly political, not merely technical: SDRs would decrease the need to recur to the IMF
conditionality in case of financial distress. If one reads carefully Camdessus’s (2016) reconstruction of those
events, it seems that the struggle was between using the IMF as an instrument of control of the global
6
The spillover effects of the Mexican crisis on the whole global economy, east-Asia
included, triggered a proposal from the Governor of the Federal Reserve Bank of
Australia, Bernie Fraser, to build a sort of Asian BIS to provide funds in case of financial
distress in the area. His talk was given in September 1995 in Adelaide. In 1996 the BIS in
Basel accepted a few new members, among which: China, India, South Korea, Singapore,
and Hong Kong.
Japan’s fragility was still unresolved: in November 1996 the Nippon Credit Bank had to
be bailed out by the Ministry of Treasury, firstly trying to rely on a consortium of private
institutions. Then with the direct involvement of the Central Bank, that decided to use the
New Financial Stabilization Fund, an instrument that had been set up only six months
earlier (Nakaso 2001, 7-8). In the following months Japan raised taxes to avoid a fiscal
deficit, but the decision was a boomerang, as it sank market expectations; as noted by
Edward Lincoln (1998, 23), Senior fellow at The Brookings Institution: “the moves in
1997 were too much too soon. The tax increases had negative real impact on the economy
as well as a negative psychological impact. Having created a pessimistic public
psychology, the government then faced a difficult task of reversing those attitudes”. In
April 1997 the Nissan Life Insurance, one of Japan’s largest insurance corporations, was
suspended. The yen started losing ground against the dollar on exchange markets and in
early May 1997 Japan suggested it might raise interest rates to defend the currency;
although this never took place, international investors started to perceive that they had
better quit the South-Eastern currencies.
This was the already seriously deteriorated financial framework in which the currency
crisis erupted. On 14 and 15 May 1997, the Thai Baht came under attack. Thai’s Prime
Minister announced on June 30th that he would not devalue the THB. Instead of assuring
investors, this triggered further speculation and on July 2nd, after wasting over $30bn to
defend the currency and running out of reserves, capital flights forced a huge devaluation6
of the Baht; on July 24th the Central Bank of Thailand announced its floating.
In brief, although the public only perceived the problem in Autumn, when major changes
took place in the Japanese banking supervisory and regulatory system7, it had already
emerged manifestly in Spring. And we may argue that – contrary to what is usually told –
the crisis in the area did not start in Thailand in July, but much earlier in the Japanese
banking sector. Thailand, with its opaque behavior, played the role of the triggering
factor.
2. The Unfolding of the Crisis and the AMF Proposal
Most commentators at that time underlined that the macroeconomic fundamentals in the
countries of the area appeared to be robust. At least, this was the case with Malaysia (Bin
Mohamad 1999), as the IMF Managing Director Michel Camdessus had recalled,
pointing with satisfaction to the policy stance implemented in the previous decade there.
economy (the US position), or as a venue for economic cooperation, as was theoretically enshrined in its
mission and as its Managing Director was struggling to pursue.
6
In five months, the Baht/Dollar rate would collapse from 23 to 56.
7
At the end of 1997 the Fiscal Structure Reform Law was enacted and early in 1998 the fiscal and financial
authorities were separated, creating the Financial Supervisory Agency. In 1998, officials of both the finance
ministry and the Bank of Japan were arrested in bribery scandals, and both the finance minister and the
governor resigned.
7
Even Korea, although suffering from high short-term foreign debts in 1997, seemed not
to be in a situation as serious as Mexico had been, as beset by temporary illiquidity rather
than fundamental insolvency; hence the need to address temporary balance of payments
adjustment, rather than “imposing major structural and institutional reforms” (Feldstein,
1998).
Despite these optimistic views, as we noted in the previous section, South-Asian
economies showed several fragilities, even in the very heart of the regional financial and
banking sector: Japan. Japan’s financial infrastructure was exposed to many challenges,
that were exacerbated by tensions with the regional partners and their inherently
increasing systemic risk. Thailand’s export-led growth model had resulted in an average
9% annual GDP growth rate between 1985 and 1996, with very similar performance in
the other countries of the area, but the debt to GDP ratio for the whole ASEAN tigers had
increased on average from 100% to 167% between 1993 and 1996. Sovereign debt risk
was perceived to be sharply increasing and the interconnections of sovereign bonds with
a banking sector in Japan (that owned much of them) at risk of collapsing played a major
source of contagion, at least as concerns market expectations. After the sharp devaluation
of the THB on July 2nd, the following day the Philippine Central Bank attempted to
defend the peso raising the overnight interest rate from 15% to 32%. Without any
success.
The domino effect had started for the whole South-Asian area. It would become a
landslide by the end of the year, affecting Indonesia, Korea and all the economies of the
region. In 1998 China (together with Russia and Brazil) would also be involved. The
impact of the crisis, in terms of GDP per capita, can be appreciated in the following
graph.
The Thai bailout, managed under the responsibility of the IMF and in which the “United
States [was] conspicuous by its absence” (as the Washington Post observed on August
12) was $17.2bn. Japan contributed for $4bn, the same sum directly provided by the IMF.
8
Despite very critical remarks8 the conditionality attached to the rescue plan was the usual
one: currency devaluation, privatization of strategic assets, trade openness, etc.
From the point of view of markets, during that August the situation was far from
stabilized, and the Thai currency depreciated further. Hamada (1999, 33) underlines that:
“during the Tokyo Meeting of Ministers in August 1997, in an effort to rescue the crisis
situation, many Asian countries were interested in the idea of a permanent international
facility that can provide financial support to troubled countries”. The time seemed to be
ripe for the Ministry of Finance of Japan to consider betting on a regional solution: the
AMF. Lipscy (2003, 95) argues that the timing of the proposal suggests a correlation to
dynamics internal to the Japanese Ministry of Finance. On July 15th, 1997, there had been
a change in the top management of the Ministry: “Sakakibara and Kuroda had been
respectively promoted to Vice Minister of International Affairs and Director of the
International Bureau” (Lipscy 2003, 94-95). Both were very much committed to the idea
of an AMF since the earlier years (Blustein 2003, 165); their rising role in the Ministry
was certainly crucial for the emergence of the proposal.
According to Murphy, though, this move had nothing to do with internal struggles. It was
a diplomacy decision, given the strict relationships that Sakakibara had established in the
earlier years with Larry Summers, the powerful9 Deputy Secretary of the US Treasury
since 1995. The two had met in Harvard, where Summers was teaching and Sakakibara
was a visiting scholar. And they were both sitting in the so-called G7D, where the
Finance Ministers’ deputies in fact negotiate agreements on the global economy within
the G7 before they are signed by the Ministers and by the Heads of Government
themselves (Blustein 20013, 34). The relationship between the two had seen moments of
tension in the months before, during, and after the Mexican crisis; but eventually Japan
agreed to help the US face the concerted bailout together with the IMF and BIS. The
Japanese government might therefore have thought that their personal relations were
robust enough to bring constructive solutions to the South-East Asian crisis. They
nevertheless had differing views on the crisis itself and on the way out.
Sakakibara, in a speech given at the World Bank in Washington in April 2000, denied
that the Asian crisis had been triggered by macroeconomic weakness. Unlike the previous
example of Mexico, the countries hit did not show short-term debt exciding “foreign
reserves by a substantial margin” (Sakakibara 2000, 2)10. Explanations had to be sought
elsewhere; mainly in a “crisis of capitalism” due to changes in the available technology
(Sakakibara 1998, 27), combined with unfettered capital movement liberalization, and a
strategic behavior of the USA against the risk of a rising hegemony of Japan in the area
(Sakakibara 2001). Policy responses needed to be designed accordingly.
8
Such as Ikegami (1999, 891-2), arguing that: “The International Monetary Fund (IMF) entered the scene by
imposing aggressive economic restructuring programs to overhaul the economic structures, financial
institutions, and political processes in Korea, Indonesia, and Thailand”.
9
Larry Summers, among whose uncles he had two Nobel laureates, such as Paul Samuelson and Kenneth
Arrow, had entered the MIT at sixteen, and became full professor at the age of 28, before joining the US
Treasury.
10
In a previous paper, presented at the Foreign Correspondents Club, Tokyo, on January 22nd, 1999,
Sakalibara (who was still Japan’s Vice Minister of Finance) had nevertheless recognized that, although
sovereign debt was not particularly high, private debt in those countries had skyrocketed in the previous years
(Sakakibara 1999).
9
A closer look at these two protagonists of the affair, Sakakibara and Kuroda, may be
inspiring. Their career within the Ministry of Finance went in parallel, at least until
Sakakibara (who was three years and a half older than Kuroda and preceded him as
Director of the International Bureau) resigned in 1999 to lead the Keio University's
Global Security Research Center11. Different in character, the two were in close
intellectual syntony, both inspired by Keynesian-like analysis and policies. Sakakibara,
studied economics at the University of Tokyo, before receiving a PhD from the
University of Michigan. He repeatedly argued against “market fundamentalism” (1999),
rooted in the alleged virtues of Walrasian general equilibrium models; in fact, he was
targeting the emerging dominance of dynamic stochastic general equilibrium models, that
suggested public authorities should refrain from intervening in the economy.
His book Beyond Capitalism: the Japanese Model of Market Economics, published in
1993 by University Press of America, had provided a few guidelines for a “third way”
(Sakakibara 1993). In a paper written in September 2000 as the transcript of his
intervention before the World Bank at the 12th Annual Conference on Development
Economics held in Washington in April 2000, Sakakibara (2000, 3) argued:
“For economists, particularly those educated under the neoclassical paradigm, it comes natural to
assume the rationality of market participants. […] In the global economy where interdependence
has become very strong and where uncertainty driven by revolutionary technological innovations
is large, the assumption of one stable equilibrium is unwarranted. We are under multiple equilibria
situation and once we leave the neighborhood of one equilibrium, we are likely to be thrown into a
very unstable area. Too much flexibility in exchange rates, in this kind of situation, is not
necessarily a blessing. Under the euphonic expectation for the future of the economy, free floating
exchange rates may have accelerated, not moderated, the boom resulting in a more serious bursting
of the bubble.”
A few pages further, he would sympathize with Soros’s The Crisis of Global Capitalism12
“where he argued that global markets are inherently instable. Expounding on two basic
concepts which he calls ‘reflexivity’ and ‘fallibility’ he leads us to the conclusion that
‘market fundamentalism is today a greater threat to open society than any totalitarian
ideology’.” (ibid., 5). In 1995 he had actively promoted the establishment of the Four
Markets Committee, with representatives from Japan, Singapore, Australia, and Hong
Kong, aiming at strengthening multilateral financial supervision and intervention, which
would become in 1996 a Six Market Committee, extended to China and the USA.
Sakakibara often underlined how regional safety nets may be crucial to tackle countryspecific or region-specific crises, as an early response or complementary instrument to the
IMF.
Haruhiko Kuroda graduated in Law, studied economics at Rice University (Houston,
Texas) and would later become Vice Minister of Finance for International Affairs (19992003). From 2003 Kuroda served as Special Advisor to the Cabinet of Prime Minister
Koizumi, while teaching economics and finance as a Professor at the Hitotsubashi
11
In February 2000 Sakakibara would be officially nominated by Japan for the post of Managing Director of
the IMF. In the following weeks, the IMF Executive Board unanimously decided to hire for that post Horst
Köhler (until March 2004, when he would be elected President of the Federal Republic of Germany).
12
The reference is to Soros (1988).
10
University Graduate School of Economics. He then became President of the Asian
Development Bank (2005-2013) and from 2013 to 2023 Governor of the Bank of Japan.
On November 18th and 19th, 1999, as Vice Minister, he would publish in the Yomiuri
Shinbun, the most important Japanese newspaper (and the most read in the world, with
over seven million copies sold each day) an article in Japanese titled The Third Way:
International Financial System, in which he emphasized, like Sakakibara, the limits of
both Marxist approaches to the North-South relations and of the neoliberal, market
radical views and policies, suggesting that a different approach to the relationship
between markets and public intervention should and could be pursued. He would be
among the most prominent supporters of the so-called Abenomics (from Shinzo Abe, the
Japanese Prime Minister from 2012 to 2020, committed to easing monetary and fiscal
policies to contrast the negative effects of Japanese secular stagnation).
As Jeremy Clift later observed, after the failed attempt to adopt an AMF, Kuroda kept a
lower profile than Sakakibara, starting to underline the compatibility between a regional
and global solutions to local crises:
“Kuroda has gone out of his way to emphasize the primacy of the IMF. ‘The IMF remains the only
global financial institution governing the international monetary system, and East Asia's regional
financial architecture must complement its role’, he wrote with University of Tokyo economist
Masahiro Kawai in the Financial Times in 2004. "Strengthening the region's financial architecture
will also strengthen the IMF's global role because regional financial stability contributes to the
stability of global finance." But Asian leaders are edging toward acting on their own, announcing
plans to boost the CMI's ability to lend without recipient countries needing to have an IMF
program in place and building up the world's largest foreign exchange reserves as a bulwark
against currency speculation and possible future instability related to the large imbalances in the
global financial system” (Clift 2006).
The protagonists of the AMF affair were therefore both extremely critical against the rise
of neoliberalism (from an intellectual perspective), DSGE models (from a theoretical
one), and US imperialism along what Williamson had described as the Washington
Consensus. According to Lipscy (2003, 94), it was Kuroda who drafted the proposal,
together with Toyoo Gyohten13 and Hajime Shinohara, from the Institute for
International Monetary Affairs in Tokyo. As he observes, the Institute was:
13
As we can read from his profile at The Chinese University of Hong Kong “Mr. Toyoo Gyohten is President
of the Institute for International Monetary Affairs. Having graduated from the University of Tokyo, Mr.
Gyohten joined the Ministry of Finance (MOF) in 1955. Before he was appointed Vice Minister of Finance
for International Affairs in 1986, he occupied various senior positions including Director-General of
International Finance Bureau at the Ministry of Finance and also served for the IMF and the Asian
Development Bank on lease. After his retirement in 1989 he was a visiting professor at Harvard University,
Princeton University and the University of St. Gallen. In 1992 he became Chairman of the Bank of Tokyo,
Ltd. (currently the Bank of Tokyo-Mitsubishi UFJ, Ltd.). Since 1995, he has been President of the IIMA and
has concurrently served as Senior Advisor to the Bank of Tokyo-Mitsubishi UFJ, Ltd since 2006. Mr.
Gyohten also chaired Working Party III of the OECD (1988-90) and the Institute of International Finance
(1994-97). He was appointed as a special advisor to Prime Minister Obuchi in 1998, advisor to the Cabinet
Secretariat (special envoy to Prime Minister), and more recently was a Special Advisor to the Minister of
Finance”.
https://www.igef.cuhk.edu.hk/programmes/executive-leadership-programme-in-global-finance/5thprogramme/detailed-program/mr-toyoo-gyohten/
11
“affiliated with Tokyo-Mitsubishi Bank, which has traditionally close ties with the International
Bureau of MOF, and the President is usually a retired Vice Minister for International Affairs (as is
Toyoo Gyohten). Shinohara and Gyohten had toyed with the idea for an ‘Asian Monetary
Organization’ in the fall of 1996 after the US/IMF bailout of Mexico, based on the premise that
the US would not act as vigorously in the event of a similar crisis in Asia14. The initial size of the
fund was envisioned to be around $20 billion. By February to March 1997, the IIMA had come up
with a blueprint for the AMO and intended to promote the proposal at the May 1997 ADB meeting
at Fukuoka as the ‘Gyohten Initiative’. However, the proposal was temporarily shelved because of
unrelated events undermining Japan’s position in Asia” (Lipscy 2003, 94)
Sakakibara, Kuroda, and the Institute for International Monetary Affairs must have
thought that the time was ripe for the official emergence of their idea in the international
arena. Under their pressure, on September 10th, 1997, the Ministry of Finance submitted
an unofficial (without any specific quantitative suggestion as concerned the number of
resources to be mobilized) proposal for an AMF to the Asian counterparts (South Korea,
Hong Kong, Indonesia, Malaysia, and Singapore). Four days later, on September 14th,
Larry Summers15 phoned Sakakibara complaining16 for not being informed, although the
two had discussed about an AMF a few days earlier in Paris17.
The official response from the USA came on September 17th, signed by Rubin and
Greenspan, “followed with visits to Asian capitals by Tim Geithner and Ted Truman, the
director of the Fed’s Division of International Finance, to lobby against Sakakibara’s
plan” (Blustein 2003, 166)18. The US top economic diplomacy had mobilized against the
AMF.
It might be interesting to note that, although Chang and Ramkishen (2001, 103-4) argue
that “the proposal was enthusiastically welcomed by many regional economies that were
eager to see Japan taking on a bigger leadership role in the region”, reactions to the
Japanese plan were positive only from Malaysia, Philippines, and Thailand. Very
negative from Australia. China replied that it would take no position, neither positive nor
negative; we will return on China’s attitude later. Hong Kong and Singapore were rather
ambiguous. The plan was formally proposed at the meeting in Hong Kong, chaired by
14
In the later years they would publish several papers as IIMA Newsletter in which they denounced the US
attempt to deeply change the economic policy structure of Japan. For example, Gyohten wrote on May 11,
1998: “U.S. government officials, scholars and journalists are the driving force behind criticism of Japan,
with some corporate executives agreeing with them, and there is support from similar groups in Europe and
Asia” (Gyothen 1998).
15
At that time U.S. Deputy Secretary of the Treasury, former Chief Economist at the World Bank, later US
Secretary of the Treasury from 1999 to 2001, President of Harvard University from 2001 to 2006 and
Director of the National Economic Council from 2009 to 2011.
16
Resentment between the two would increase in the following years to the point that in 2000, at the World
Bank in Washington, Sakakibara publicly ironized on Summers’ claim (who in the meanwhile had become
US Secretary of the Treasury) that greater attention should be given to the “danger of opening up to shortterm capital” (Sakakibara 2000, 12).
17
Sakakibara had nevertheless not mentioned that, in his mind, the AMF might act independently from the
IMF (Blustein 2003, 166).
18
Robert Rubin was US Secretary of the Treasury and Alan Greenspan Chairman of the Federal Reserve
Board of Governors. Timothy Geithner (later US Secretary of the Treasury) was at that time Assistant
Secretary for International Affairs at the US Treasury. Edwin M. Truman was Director of the Division of
International Finance at the FED. The US top economic institutions were joining forces to stop Sakakibara
and the AMF.
12
Japan, at which the USA were admitted only as observers (Blustein 2003, 167). It
envisaged an AMF capitalized with $100bn: $50bn from Japan, and the remaining $50bn
from other regional powers, that collectively enjoyed (at that time) balance of payment
surpluses of around $800bn (Narine 2003, 68). It was too late. The US diplomacy had
already stopped any possible regional solution to the East-Asian currency crisis.
3. What next? The return of the IMF and the role of China
As we already noted, the contagion kept spreading. Indonesia, at the end of October,
asked for the intervention of the IMF. South Korea would come next. Without a regional
safety net and with the USA being reluctant to join the rescue plans, the IMF reacquired a
central role on the stage. Plausible reconstructions of the unfolding of the most critical
events in the following months is provided by Blustein (2003) and Lipscy (2003).
Blustein (2003, 25) suggests that the IMF was taken by surprise by a sudden change in
the very nature of financial crises. While with Mexico it still was a matter of current
account disequilibrium, that could effectively be tackled basically with a devaluation (to
raise exports) and income reduction (to decrease imports), in the East-Asian case it was a
capital account crisis, with hot money flying too quickly, first in and then out of these
countries. This required a different set of instruments19 that the IMF did not possess or
was not prepared to implement yet.
As Narine (2003, 70) recalls: “in November 1997 Asian finance officials met in Manila
and worked out the ‘Manila Framework' which stipulated that any bailout mechanism
could only complement the IMF's supervisory role. The meeting called for a new
‘framework for regional cooperation' but it did not endorse the idea of an Asian rescue
fund”. As Chris Downie (2004, 94) would underline: “recent moves towards financial
integration in Asia recognise that the destabilising factors endemic within financial
markets need to be addressed, and not just weaknesses of existing institutions. Asian
governments are also realising that a regional arrangement may be more appropriate than
existing international structures. For future crises to be averted, new institutions may be
required”. Despite the failure of – and skepticism around – Japan’s AMF proposal, the
need to increase regional cooperation was largely shared.
As Kenen and Meade (2008, 152) suggest, this initiative (the Manila Framework) was
perceived as being steered by the IMF and the USA, receiving lukewarm approval. In
June 1998, the IMF issued an official statement20 on the East-Asian financial crisis in
which a few critical points and policy prescriptions were highlighted, pretending the IMF
was perfectly confident on how to manage the situation. A document that Japan
presumably did not appreciate. On October 3, 1998, the Japanese Ministry of Finance
19
It probably would also require an increased capitalization and a more rapid instrument of active
intervention, such as a massive issue of SDRs, as Camdessus had attempted in 1994. The problem with SDRs
is that they are unconditional. There is no conditionality attached to their emission, which may result in moral
hazard, and certainly runs against the interest of the big financial market players, all of them US-based.
20
Among them, the document argued: “Governance must be improved in the public and corporate sectors,
and transparency and accountability strengthened. Many recent difficulties spring from extensive government
intervention in the economy, as well as widespread political patronage, nepotism, and lax accounting
practices. In order for confidence to be restored, political leaders must send unambiguous signals that such
abuses will no longer be tolerated”; https://www.imf.org/external/pubs/ft/fandd/1998/06/imfstaff.htm
13
took another unilateral initiative (Hamada 1999), called the New Miyazawa Initiative21, in
which it was stated:
“To assist Asian countries in overcoming their economic difficulties and to contribute to the
stability of international financial markets, Japan stands ready to provide a package of support
measures totaling US$30 billion, of which US$15 billion will be made available for the mediumto long-term financial needs for economic recovery in Asian countries, and another US$15 billion
will be set aside for their possible short-term capital needs during the process of implementing
economic reform” (Finance Ministry of Japan 1998).
This was indeed activated in the following months to provide financial support to the
Philippines, Korea, and Malaysia. After 1999 it was no longer in function.
The search for a compromise between regional and global solutions was becoming the
key issue in Asian integration. As Fred Bergsten, founder of the Peterson Institute for
International Economics, wrote in December 1998:
“Suitably elaborated and modified to include the United States and several other countries,
however, an Asia Pacific Monetary Fund (APMF) could be extremely useful. An APMF could in
fact provide a valuable regional complement for the International Monetary Fund in the same way
that the Asian Development Bank (and the other regional development banks) complements the
World Bank. It would respond to the strongly felt need, on the part of many Asians, for “their own
institution” that will be more immediately responsive to their concerns. The subsequent deepening
and broadening of the Asian economic crisis underlines the merit of creating such an institution”.
A light but more structured institutional framework for regional cooperation would
materialize a few years later, although in embryonic form, (after a generic commitment
taken in December 1997 in Kuala Lumpur, Malaysia) with an initiative taken on May 6th,
2000 at the annual meeting of the Board of Governors of the Asian Development Bank
held in Chiang Mai (Thailand) by the Finance Ministers of the “ASEAN+3” group
(ASEAN + Japan, China, and South Korea). The agenda of the meeting was focused on
the activation of a joint pool of reserves to face speculative attacks against the currencies
and the creation of a system of bilateral swap agreements to be activated in case of
financial stress. The proposal, that would be called the Chiang Mai Initiative
(Sussangkarn 2010), was supported also by the IMF Managing Director Horst Köhler, as
an instrument synergic to the action of the IMF, in case of need. The role of the Asian
Development Bank was also crucial in those years, with the establishment of a Regional
Economic Monitoring Unit as early as 1999.
Until now, we basically neglected the role of China in this affair, which now requires
some further enquiry. Considering the bailouts of Thailand, Indonesia, and South Korea,
$35bn out of $114.2bn came from the IMF (and further $16bn from the WB), while Japan
contributed with $19bn. China contributed only with $4bn.
Table 1. IMF Financial Support Packages ($Bn)
Thailand
Indonesia
21
South Korea
The initiative was named after Kiichi Miyazawa, who took office again – being in that position already in
the 1980s (and later even Prime Minister, in the early Nineties) – as Minister of Finance in Japan since July
30, 1998 (until April 26, 2001).
14
Approved (1997)
Total Pledged
IMF
U. S.
World Bank
Asian Dev. Bank
Bank of Japan
Others
August 20
$17.2
$ 3.9
$ 0
$ 1.5
$ 1.2
$ 4.0
$ 6.6
November 5
$40
$10.1
$ 3.0
$ 4.5
$ 3.5
$ 5.0
$26.0
December 4
$57
$21.0
$ 5.0
$10.0
$ 4.0
$10.0
$ 7.0
Source: Nanto (1998)
A small contribution, in absolute terms. A big one, if compared to the size of the Chinese
economy at that time. We already noted that China was reluctant to support Japan’s
proposal. As Sakakibara (2017) recalls: “I think it was because China was not in favor of
a Japanese initiative. In retrospect, Japan lacked contacts with top Beijing officials. We
asked their counterparts in Hong Kong to connect us with them so that we could explain
our intention but it did not work. In short, Japan failed to lay the groundwork with
China”. Amyx (2005) noted that the Japanese diplomatically failed by using the Hong
Kong Monetary Authority to elicit Chinese support, only later seeking support from the
People’s Bank of China. We are inclined to think that China’s negative attitude was not
entirely due to a Japanese failure “to lay the groundwork with China”, but also to a
precise Chinese interest.
China in those years was an emerging economic and political power, negotiating its
membership in the World Trade Organization, that crucially depended on a cooptation by
the USA (eventually fulfilled in December 2001). This might be a reason for China’s
cautious behavior: a matter of strategic pragmatism. Furthermore, both Eichengreen
(2002) and Keijzer (2001), the latter from the Institute for International Monetary Affairs
in Tokyo, suggest that China feared Japanese dominance with the AMF proposal, as did
the United States.
A further look at China’s macroeconomic performance might cast further light on this.
China, in 1997, was starting booming in both exports and income. Hence the significant
drop in foreign reserves relatively to its increasing import requirements during the period
1998-2000, until a record-low of less than one month of financing coverage while both
GDP and imports were steadily increasing. In 1998, China’s GDP was slightly over one
thousand billion dollars and imports 15% of GDP, so roughly $150bn, while reserves
were only slightly above that figure. It is reasonable to imagine that China and the USA,
at least implicitly, agreed on a common strategy in the area. The subsequent acceleration
of China’s exports, that resulted in a skyrocketing accumulation of foreign reserves in US
dollars until the building up of the global imbalances that characterized the first two
decades of this new millennium, was also in the interest of the USA, thus allowed to run
structural balance of payments deficits.
15
While in December 2011 the Japanese Masahiro Kawai (2011), Dean & CEO of the
Asian Development Bank Institute, still believed in an unbelievable dream, based on a few
(faulty) assumptions (that ASEAN+3 would become the largest block by GDP in the
2010 decade; that it would have its own currency; that that leading currency in an Asian
monetary basket would be the yen), China had been emerging as a leader in the area.
Under its impulse, the CMI would become multilateral in 2009, providing – de facto – an
infrastructure very similar to the one unsuccessfully proposed by Japan in 1997.
Concluding remarks
In a Taiwanese publication designed as an explainer of the crisis, the Chinese Casper
Shih, Chairman of the Global Chinese Competitiveness Foundation, talking about what
he judged as a “Historical Inevitability”, wrote: “The East Asian financial crisis … came
without early warning” (Wen 1999). We suggested here that this claim is largely untrue.
Despite the crisis being dramatized by the behavior of the USA and IMF, there were
several signs of local fragility in the region and misinterpretations of the evolution of
international relations that should have suggested a more cautious approach to the first
signals of financial turmoil. Many intertwined factors conjured to building up the crisis,
that was the mirror of latent, major conflicts: between opposing views of the global and
regional balance of power, of the (relative and evolving) weight of each major actor, of
the role of country-specific institutions in controlling and steering the economy, and
many more.
A multifaceted and complex framework that cannot be reduced to single-causal
correlations and needs several different layers to be disentangled and grasped. This is the
reason why we attempted a detailed reconstruction of the evolution of the events, the
main protagonists and their underlying theoretical assumptions, the relevant policy
proposals.
Optimism for the cooperative solution that had seen Japan and the USA bailing out
Mexico, with the assistance of all major international institutions, had raised expectations
that a similar solution might be replicable in Asia. An increasingly vulnerable Japan,
whose financial and industrial fragility was in turn the outcome of an aggressive
exchange rate policy imposed by the USA, was trying to maintain a leading role in the
area, as the US had managed to keep their hegemonic role in the Mexican crisis. When
the crisis erupted and the IMF imposed heavy conditionality on Thailand, the Japanese
top officials at the Ministry of Finance tried to exploit resentment and attempted a
16
regional path to recovery, keeping both the USA and IMF out of the game. The global
hegemonic ambitions of the USA, and their strategic use of the IMF, could not allow any
such move. Hence the failure of the regional attempt, which eventually humiliated
Japan’s hegemonic temptations in East-Asia, providing room for the rise of the Chinese
influence. While writing these concluding remarks, we were made aware of an article
published on August 31st by Jeffrey Sachs where he makes very similar considerations22.
Ironically, the result of the increasing USA pressure for a penetration of capitals in all
global markets (supported by an increasingly dominant neoliberal narrative) ended up
weakening the US hegemony: Japan, US closest ally, was since then much more reluctant
to play the watchdog of the area on behalf of the USA, while China took an increasingly
hegemonic role in the area. The USA missed the chance to properly address the rising
Chinese ambitions over the area and the global economy. It was certainly not easy to
foresee this. Japan’s rampant behavior in the area probably seemed to endanger US
hegemony more than China.
Maybe, Clinton’s USA took it far too seriously the global responsibility generated by
Fukuyama’s The End of History and the Last Man. Instead of struggling to weaponize the
international monetary infrastructures, with the side-effect of challenging the legitimacy
of the IMF, the USA had better look at the world in a more dynamic, problematic, and
strategic way. If it was difficult to imagine that, 25 years later, China would challenge the
US global hegemony and force the world into another bilateral confrontation, not too
much different from the Cold War, the USA should have avoided humiliating Japan’s
attempt – although clumsy and surely not well orchestrated – at regional leadership in the
area. A more constructive, although difficult, dialogue with Japan might have softened
the skyrocketing rise of China’s leadership and reduced the potentially devastating
building up of the global imbalances, that we are currently experiencing at the world
level.
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