Post-Crisis Regional Financial Architecture in East Asia for New International Financial System

During the last couple of decades, the East Asian economy has experienced the deepening of market-driven integration through the expansion of trade, foreign direct investment(FDI) and capital flows. On the other hand, the strengthened regional economic linkages and interdependence provide a new challenge of the contagion of financial crisis. Nevertheless, government-led integration, such as institution- building for regional financial stability and monetary cooperation has fallen well short of expectations in its achievements. In addition, the recent global financial crisis originated from the US raised additional issues such as problems of excessive dependency on a single international vehicle currency and lack of regional financial safety net etc. In this paper, the regional financial architecture in East Asia is examined in three aspects; supply of foreign exchange liquidity, exchange rate stability and financial stability to prevent the recurrence of the similar financial distress in the region. First, for the supply of foreign exchange liquidity, the effectiveness of the regional financial safety net such as CMIM, currency swaps among central banks should be enhanced. A creation of the regional currency such as ACU could be recommended as well, which would contribute to the stabilization of exchange rates, the development of intra-regional capital market, the reflux of foreign exchange reserves in the region, and as a consequence, the alleviation of foreign exchange liquidity crunch. Second, for the stability of exchange rates intra-regionally and extra-regionally, first of all, macroeconomic policy dialogues should be developed towards more effective ways. Information sharing should be more enhanced, and the current simple information sharing stage should be upgraded to the peer review and peer pressure or due diligence stage. An independent, professional regional organization that prepares comprehensive papers for analyses, assessments, and discussion to support the process is necessary as well. Next, for the stability of exchange rates, in the short-term, different exchange rate regimes among countries over the region could be modified towards their convergence. As a possible practical approach, a soft basket band crawling(BBC) system could be recommended. In the medium/long-term, schemes for the exchange rate stability and for the supply of emergent liquidity should be institutionalized. Among various options for monetary cooperation for exchange rate stability, ACU composed of regional currencies as well as some important extra-regional currencies such as dollar and euro could be proposed. Third, in order to re-cycle East Asian savings in the region, to reduce the double mismatches, and to develop the regional financial system in a more balanced way, the regional financial market, e.g., the regional bond market and the foreign exchange market should be developed. For the improvement of the financial stability in the region, communication for information sharing, monitoring and surveillance system on the vulnerability of the financial system and capital flows also should be enhanced. For the successful achievement of the above regional financial architecture, the role of big countries in the region, China and Japan, is, needless to say, really crucial. Their rivalry towards hegemony over the region, which maybe the case, could not be conducive in any case to even the achievement of their hegemony as well as regional cooperation.