Giant Money Market

Where will the yen head after the launch of the euro and Japan's "Big Bang'' reforms? Japanese policy-makers have been keen to boost the yen's global profile via the sweeping financial market

deregulation of the Big Bang.

Prime Minister Ryutaro Hashimoto has made it clear the advent of the euro is among motives for Big Bang and Japan's competitive interest in wider use of the yen.

More recently, the Asian currency crisis, which has forced many Asian economies to abort dollar-peg currency systems, has been lending support to Tokyo's intentions.

Takatoshi Kato, special adviser to Finance Minister Hikaru Matsunaga, said: "The yen's globalisation is now being advanced more by yen demand from Asian nations than Tokyo's initiatives.''

The region's monetary authorities have stronger interest in yen-based fund-raising than in the dollar, where they face difficulties in fund pro~curement, particularly after the crisis, Kato said.

Holding debt in yen is also preferred for the purpose of diversifying currency risks, he added.

Eisuke Sakakibara, vice finance minister for international affairs, has said Asian nations depend too much on the U.S. dollar and should use the yen more widely in regional trade.~

Japan's ruling Liberal Democratic Party (LDP) is active in promoting greater use of the yen, calling for reform of Japan's giant money market and scrapping of taxes to make Tokyo more attractive for

investment of Asia's massive official reserves.

But economists say it will be hard for Big Bang alone to earn a higher profile for the Japanese currency. Traditionally, the level of the yen's globalisation is gauged by how much the yen is used for

cross-border trade and investment, and the size of reserves held in the yen.

"But those are only minor status symbols,'' said Masao Suzaki, professor of economics at Tokyo's Senshu University. "The real test of whether the yen deserves a 'global currency' tag is whether Japan

is able to present a good example of economic policies to other nations and make them want to follow in its footsteps,'' Suzaki said. This criteria worked for Germany and for European economic and

monetary union (EMU).

The euro, the 15-member European Union's planned single currency, appears set for a January 1999 launch with 11 states taking part at the outset. "Japan needs to act as an anchor for the region's

economic and financial policies,'' said Takeshi Ohta, special adviser to the president of Daiwa Bank Ltd and former executive director of the Bank of Japan.

Suzaki said that unfortunately, no country models policies after the Japanese, despite Tokyo's enthusiasm since the 1980s to boost the yen's status as a key currency. Japan has been struggling with

this dilemma. Its traditional growth-centred policies, carefully crafted by bureaucrats, have made it the world's largest creditor.

On the other hand, such policies implemented hand-in-hand by a powerful bureaucracy and cooperative industries have made for bloated and inefficient industries such as Japan's banking sector, and

have also spawned massive budget deficits.

In the medium term, Japan faces the task of reducing the deficit in view of its rapidly ageing population through tight spending, structural reform and laissez-faire, market-oriented policies,

represented by Big Bang.

But Japan needs to achieve those goals under the severe situation of a stagnant economy and heavily indebted banking sector, which calls for more government spending.

"The key to Tokyo's leadership in the region and the yen's globalisation is how quickly Japan overcomes its banking woes, streamlines its bu~reaucracy and cuts its deficit, displaying a model

policy,'' Suzaki said.

Fred Bergsten, director of the Institute for International Economics, a Washington-based think-tank, predicted the euro and the dollar could eventually each end up with a 40 percent share of

international transactions. This would point towards a bipolar system with Japan as a "junior partner''.

Economists said the launch of the euro next January would force the U.S. dollar to gradually give up its dominant power and privilege as the key currency.

"The yen should become strong enough to avoid being at the mercy of the bipolar system or volatility expected during a change in the power balance,'' Ohta said. "Much depends on how much market

confidence the euro can gain during the transitional period between 1999 and 2002,'' said Hideki Hayashi, chief economist at the Europe Department of the Japan Centre for International Finance.

The euro's outlook was brightened by EMU members' recent commitment to cutting interest rates and bringing inflation of non-core members close to those of core members, Hayashi said. The market had

previously predicted higher interest rates~ among EMU members in a run-up to the euro's launch. But high unemployment rates in core nations and a deflationary impact from the Asian crisis made the

recent commitment possible, Hayashi said. He predicted U.S. growth rates would decline in 1999ú2002, pointing to a strong euro versus the dollar.

The yen seems to be outside the power balance, but the euro's advent should spur Big Bang, which is designed to make the yen's presence stronger in world markets, Hayashi said.

Suzaki said globalisation of the yen should be considered in the context of not just the changing world power balance after the launch of the euro, but also of China's advance into the free-market

system.

"China's entry into the market economy has made it more difficult and complex for Japan alone to take a leadership role in regional economy and finance,'' Suzaki said. In the past few decades,

Japan's direct investment in newly industrialising economies such as Singapore, South Korea, Hong Kong and ASEAN members has had a direct impact on push~ing up living standards and modernising

industries, but the scale of those economies is comparatively small, Suzaki said.

Japan cannot respond alone to investment demand from China, with its population of 1.2 billion and its system being in the midst of a transformation to capitalism, he said. "Policy-makers must be

aware the yen cannot stand alone as a key currency of the region. They should instead give serious thought to an Asian currency unit or to a basket of currencies with which inter-government

transactions could be settled,'' Suzaki said.