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93Phillip Lipscy

Stanford Journal of East Asian Affairs

JapanJapan’s Asian Monetary Fund Proposal

Phillip Y. Lipscy

I. IntroductionWhen Japanese financial authorities proposed

the creation of an Asian Monetary Fund (AMF)at the height of the Asian Financial Crisis in thefall of 1997, the international financialcommunity seemed to release a collective gasp.The intrepid proposal for a regional alternativeto the International Monetary Fund (IMF) seemedto arise without warning and at the worst possiblemoment. In the eyes of many, it was even moresurprising that the proposal originated from theJapanese financial bureaucracy, a group notparticularly renown for its audacity or creativepolicy entrepreneurship. The proposal raisedtemporary hopes among the crisis-riddeneconomies of Asia but elicited a stringent rebukefrom the IMF and the US Treasury, and ultimatelyfell to the wayside in favor of a more IMF-centeredapproach.1

Although the AMF proposal stirred virulentcontroversy and ignited an unusually visible conflictbetween the financial authorities of Japan and theUnited States, very little analysis has been conductedafter its rejection. In this paper, I will provide anexposition focusing on three aspects of the proposal.First, building off of personal interviews conductedin the summer of 2000 with several senior Ministryof Finance (MOF) officials including EisukeSakakibara, former Vice Minister for InternationalAffairs, and key players such as Hajime Shinohara,one of the masterminds behind the AMF proposal, Iwill explain how the AMF emerged as a Japanesegovernment initiative.

Second, I will provide an explanation ofmotivations. Why did the Japanese financialauthorities choose to push for an AMF during the

height of the Asian Crisis? What drove the USand the IMF to stringently oppose the proposal?Contrary to analyses focusing on ideology orconcerns for economic efficiency, I will providean argument based on national self-interest.During the crisis, Japan had a much strongerpreference for rapid liquidity provision due to itshigh levels of banking exposure and closeeconomic ties with East Asia. Comparativelyspeaking, the US had weak ties and tilted towardsemphasizing moral hazard concerns. Meanwhile,the lack of Japanese institutional leverage withinthe IMF assured that Japanese interests could notbe realized within the existing internationalfinancial architecture. Thus, Japan pushed foran AMF and provided credit through a series ofbilateral initiatives, while the US (and the IMF)emphasized the need for structural reforms andimposed relatively harsh conditionalities onlending.

Finally, I will discuss the feasibility for anAMF in the future. Although the debate over theAMF seemingly revolves around questions ofeconomic efficiency, motivations and outcomesare largely driven by political concerns. This isnot likely to change in the future. However, Japanappears to be adopting a gradualist approach bypromoting a regional bilateral swap network thatmay eventually facilitate or evolve into a full-fledged institution.

II. Japan and the Asian Monetary FundWhen Japanese financial authorities proposed

the creation of an AMF at the G7-IMF meetingsin Hong Kong during September 20-25, 1997,most observers were taken by surprise. Oneanalyst comments that the proposal emerged “outof the blue.”2 Among officials within the US

1 For a general exposition, see Sakakibara, Eisuke. Nihon to Sekai ga Furueta Hi [The Day that Rocked Japan and the World]. Tokyo: ChuoKoron Shinsha, 2000.

2 Rowley, Anthony. “Asian Fund Special: The Battle of Hong Kong.” Capital Trends 2, no. 13, November 1997. <http://www.gwjapan.com/ftp/pub/nrca/ctv2n13b.html> (5 May 2001).

94 Japan’s Asian Monetary Fund Proposal

Volume 3 | Number 1 | Spring 2003

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n Treasury, the plan was seen as half-baked anddevoid of meaningful details. Undoubtedly, thetiming was peculiar – by September, both thePhilippines and Indonesia had floated theircurrencies and the Asian Financial Crisis wasincreasingly showing signs of contagion. Undersuch conditions, stirring controversy over aproposal to significantly reform the structuraldynamics of the international financialinstitutions could be gravely destabilizing. Whatled the Japanese Ministry of Finance (MOF) topropose this regional alternative to the IMF? Thissection traces the AMF from its origins to its defacto rejection at Manila in November 18-19,1997.

MOF bureaucrats seriously began promotingthe AMF proposal starting in late August 1997.However, the proposal appears to have deeperroots and was not as half-baked as conventionallyassumed. Like many initiatives emanating fromthe Japanese bureaucracy, the origins of the AMFproposal are not immediately transparent. In hismemoir, Sakakibara merely indicates that theAMF idea had been formulated and supported byHaruhiko Kuroda (then Director of theInternational Bureau of MOF, later Vice Ministerfor International Affairs) and “others” within thecountry.3 At least part of the opacity seems tostem from reluctance to take credit for the rathercontroversial proposal. When the AMF initiallysurfaced, the Nikkei Shinbun (Japan’s mostprominent economic newspaper) repeatedlydescribed the proposal as being “advocated byThailand and other countries” and an officialMOF report takes pains to point out that “[Aproposal similar to the AMF] had been alreadydiscussed among ASEAN countries in the springof 1997.”4 At least initially, the Japanese financial

authorities appear to have been wary of pushingfor the proposal too openly and instead chose toportray themselves as responding to an initiativeemerging from other Asian countries.

According to several informed sources,however, Toyoo Gyohten and Hajime Shinohara ofthe Institute for Monetary Affairs (IIMA) workedclosely with Haruhiko Kuroda in formulating theproposal. IIMA is affiliated with Tokyo-MitsubishiBank, which has traditionally close ties with theInternational Bureau of MOF, and the President isusually a retired Vice Minister for InternationalAffairs (as is Toyoo Gyohten). Shinohara andGyohten had toyed with the idea for an “AsianMonetary Organization” in the fall of 1996 afterthe US/IMF bailout of Mexico, based on the premisethat the US would not act as vigorously in the eventof a similar crisis in Asia. The initial size of thefund was envisioned to be around $20 billion. ByFebruary to March 1997, the IIMA had come upwith a blueprint for the AMO and intended topromote the proposal at the May 1997 ADB meetingat Fukuoka as the “Gyohten Initiative.” However,the proposal was temporarily shelved because ofunrelated events undermining Japan’s position inAsia.5

By August 1997, however, the tide had reversed.After Thai authorities floated the baht on June 2,Japan played a major role in facilitating bilateralcommitments towards the IMF rescue package.Sakakibara quotes Thai Finance Minister ThanongBidaya as saying, “Although I was disappointed bythe Japanese government’s reaction on July 18 (whenJapan refused to commit funds on a bilateral basis),now I am deeply grateful. This day will be firmlyengraved in Thai history.”6 Japan itself committed$4 billion to the $17.2 billion package, an amountequivalent to the contribution from the IMF.7

3 Sakakibara, Eisuke. Nihon to Sekai ga Furueta Hi [The Day that Rocked Japan and the World]. Tokyo: Chuo Koron Shinsha, 2000. Pp.182.

4 Ministry of Finance (Japan). The Council on Foreign Exchange and Other Transactions, “Lessons from the Asian Currency Crises – RisksRelated to Short-Term Capital Movement and the”21st Century-Type” Currency Crisis. 19 May 1998. <http://www.mof.go.jp/english/tosin/e1a703.htm> (15 May 2001). Chapter 2.

5 According to a knowledgeable source, MOF had undermined its position within Asia by expanding the so-called “Four Markets Committee”(FMC) to a “Six Markets Committee.” The initial FMC had been set up in 1995 as an initiative by Sakakibara and included Hong Kong,Singapore, Australia, and Japan. The goal was to pursue exchange rate stability and cooperative intervention. In 1996, the FMC was expandedto include the US and China, and some references were made to the committee as constituting an “Asian G6.” This was not well received byseveral countries, most notably Korea and Taiwan, who protested that their economic sophistication exceeded that of China. This debacleundermined MOF’s position in Asia and made promotion of the AMO proposal difficult. (Personal Interview, 11 September 2000.)

6 [my translation of the Japanese text]. Sakakibara, Nihon to Sekai ga Furueta Hi, 181.

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Meanwhile, the United States took a hands-offattitude at this early stage of the Asian Crisis. TheWashington Post noted on August 12, 1997 that the“United States [was] conspicuous by its absence”during the organization of the Thai bailout.8 MOFofficials noted that the Thai support meeting hadcreated an “Asian Consensus” and to some extentlegitimized Japan’s role as a regional leader at theexpense of the United States.

Another important development contributingto the emergence of the AMF proposal concernedthe internal dynamics within MOF. Sakakibaraand Kuroda had been respectively promoted toVice Minister of International Affairs and Directorof the International Bureau in July 1997, puttingin place a leadership supportive of and willing topromote the AMF idea.9 Although Sakakibarahimself was not responsible for formulating theproposal, his leadership appears to have beencritical in promoting the AMF – more traditionalMOF bureaucrats probably would have shied awayfrom the sheer possibility of colliding with theUS Treasury and the IMF.10

Earlier formulations of the AMF proposalsuch as the AMO were probably not very detailedor formalized, and several key MOF policy makersdid not recognize that such a predecessor existed.Regardless of the relationship between the earlierand later versions, however, it is clear that officialendorsement of the AMF proposal by MOF didnot come until around August and September1997. Sakakibara apparently played the key roleof perceiving a ripe opportunity to promote aninchoate proposal informally held among severalhigh-level players in the Japanese internationalfinancial policy elite.11

According to Sakakibara, MOF began seriouswork on the AMF proposal following the IMF-sponsored Thai support meeting held in Tokyo on

August 11. He asserts that an “Asian sense ofsolidarity” pervaded this meeting and became a keyfactor in his decision to promote the AMF plan.12

An informed source also noted that the Thai bailoutpackage exposed IMF underfunding and served asa model for the AMF by demonstrating that poolingabundant Asian reserves could be an effectivestrategy in dealing with financial crises. The AMFwould also obviate tedious and time-consumingconsensus building in the future by automatingcommitments.13 Mari Pangestu at the Center forStrategic and International Studies in Jakarta alsonotes that, “The rescue package for Thailand in factmarked the beginnings of an Asian fund. The newpart of the idea is to prepare such funds in advanceof the crisis, instead of raising them after the crisishas struck.”14

After the meeting in Thailand, MOF formulateda basic plan for the AMF and began to promote theidea among Asian countries in late August. At thispoint, the AMF was envisioned as a $100 billionfund composed of ten members – China, HongKong, Japan, South Korea, Australia, Indonesia,Malaysia, Singapore, Thailand, and the Philippines.Notably, membership was not extended to the UnitedStates, and the original policy memo suggested thatthe AMF would not necessarily act in unison withthe IMF.15 Sakakibara later indicated that he didnot directly communicate the proposal to the UnitedStates because he foresaw stiff resistance andbelieved that the US would accept the proposal onlyreluctantly in the face of an “Asian consensus,”16

more or less as a fait accompli.The US Treasury acted immediately after

obtaining information on the AMF and activelyopposed it. According to Sakakibara, thenDeputy Treasury Secretary Larry Summersca l led h im di rec t ly a t h is res idence a tmidnight and angrily started, “I thought you

7 MOF, Lessons from the Asian Currency Crises, Appendix 19.8 Blustein, Paul. “Rescue Loans Are Pledged To Thailand, Without U.S.” Washington Post, 12 August 1997, sec C, p. 1.9 Personal Interview, 11 September 2000.10 MOF Official, Personal Interview, 11 August 2000.11 Former MOF Official, Personal Interview, 20 September 2000.12 Sakakibara, Nihon to Sekai ga Furueta Hi, 180-182.13 Personal Interview, 11 September 2000.14 Pangetsu, Mari. “The rescue package for Thailand in fact represented the beginnings of the Asian Fund.” In “Forum: Is the Asian Fund a

winning idea?” Capital Trends 2, no. 13, November 1997. <http://www.gwjapan.com/ftp/pub/nrca/ctv2n13d.html> (5 May 2001).15 Sakakibara, Nihon to Sekai ga Furueta Hi, 183-4.16 Former MOF Official, Personal Interview, 9/20/00



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n were my friend.”17 During a heated two-hourconversation, Summers allegedly criticized the planfor excluding the United States and allowing foraction autonomous of the IMF. Sakakibara believesthe stringent American reaction was driven by itsperception that Japan was posing a challenge toAmerican hegemony in Asia through the AMF.18

The official line of the US Treasury focused on twokey factors: Moral Hazard and Duplication.According to this line of argument, the AMF wouldcreate an unnecessary incentive for Asian countriesto postpone adjustment and would add very little tothe pre-existing system centered on the IMF.

Although “[the AMF] received a warmreception in virtually every Southeast Asian capital”and Taiwan and South Korea were favorablydisposed, support began fading immediately as theUS and IMF expressed opposition.19 Sakakibarastrongly implies that the US used enticements suchas increased IMF quotas for Asian countries andpromises regarding the NAB (New Arrangementsto Borrow) in order to build support against theAMF.20 An informed source also indicated that theUS lobbied China to oppose the plan by emphasizingthe threat of “Japanese hegemony.”21 Contrary tosome outside sources that point to MOF“backpedaling” subsequent to US opposition,22

Sakakibara explicitly states that Japan activelycompeted with the US through its persistent effortsto build a consensus around the AMF. The wholeaffair reached a climax at the Regional FinanceMinister’s meeting held in Hong Kong on November21, to which the US and IMF attended as observers.While ASEAN and South Korea expressed supportfor the AMF proposal, Hong Kong and Australiaremained neutral, and China voiced no opinion.23

Sakakibara had failed to deliver his Asian consensus.Without Chinese support and in the face of graveUS opposition, the AMF proposal was effectively dead.

In its place came the “Manila Framework,” acooperative framework envisaged under four broadheadings:

1. A mechanism for regional economicsurveillance to complement the IMF’s globalsurveillance

2. Enhanced economic and technical cooperationin strengthening domestic financial systemsand regulatory mechanisms

3. Measures to strengthen the IMF’s capacity torespond to financial crises

4. A cooperative financing arrangement thatwould supplement IMF resources.24

Japan benefited from the opening of the IMF regionaloffice in Tokyo, which, one observer notes, “is quicklydeveloping into the locus of regional IMF activities suchas economic surveillance.”25 The Manila Framework,however, marked an indisputable victory for the IMF-centered approach of the US. The framework has noinstitutional component or the regional orientation ofan AMF, and the core prescriptions are designed toenhance rather than weaken the role of the IMF.

III. MotivationsThis section seeks to explain two empirical

questions raised in the preceding section. First, whydid Japanese financial authorities propose the AMFwhen they did? Second, what led the US and the IMFto oppose the proposal? I will argue that the answer toboth of these questions lies in national preferencestowards the tradeoff between liquidity provision andmoral hazard.

The line below represents the tradeoff a countryfaces when confronted with a financial crisis in a foreigncountry. The dilemma is a familiar one. The provisionof rapid, abundant liquidity to a country under crisiswill comfort investors and increase the likelihood that

17 Sakakibara, Nihon to Sekai ga Furueta Hi, 185.18 Ibid.19 Altbach, Eric. “The Asian Monetary Fund Proposal: A Case Study of Japanese Regional Leadership.” Japan Economic Institute Report no.

47a (19 December 1997). Pp. 10.20 Sakakibara, Nihon to Sekai ga Furueta Hi, 186.21 Personal Interview, 11 September 2000.22 Altbach, “The Asian Monetary Fund Proposal: A Case Study of Japanese Regional Leadership,” 10.23 Sakakibara, Nihon to Sekai ga Furueta Hi, 189.24 MOF, Lessons from the Asian Currency Crises – Risks Related to Short-Term Capital Movement and the”21st Century-Type” Currency

Crisis.25 Rowley, Anthony. “International Finance: Asian Fund, R.I.P.” Capital Trends 2, no. 14, December 1997. <http://www.gwjapan.com/ftp/pub/

nrca/ctv2n14g.html> (15 May 2001). Pp. 2.

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the crisis will subside at least for the time being.However, easy liquidity also contributes to moral hazard– investors will make riskier investments and countrieswill shirk from reforms such as enhanced bankingregulation (See Diagram 1). If the international systemwere governed by a single, non-political lender of lastresort, a rational policy could be undertaken on a case-by-case basis to balance the two opposing concerns. Inthe absence of such a centralized decision-maker, theliquidity provision vs. moral hazard tradeoff becomesdistributive in nature. Political considerations andeconomic ties will influence state decisions, and rescueoperations will be determined by the position of keycreditor states on the preference line.

Diagram 2: Thailand as a % of Lending to Developing Countries

JapanEUUSA

Q4

1

98

5

Q2

1

98

6

Q4

1

98

6

Q2

1

98

7

Q4

1

98

7

Q2

1

98

8

Q4

1

98

8

Q2

1

98

9

Q4

1

98

9

Q2

1

99

0

Q4

1

99

0

Q2

1

99

1

Q4

1

99

1

Q2

1

99

2

Q4

1

99

2

Q2

1

99

3

Q4

1

99

3

Q2

1

99

4

Q4

1

99

4

Q2

1

99

5

Q4

1

99

5

Q2

1

99

6

Q4

1

99

6

Q2

1

99

7

Q4

1

99

7

Q2

1

99

8

Q4

1

99

8

Q2

1

99

9

Q4

1

99

9

Q1

2

00

0

Q2

2

00

0

Q3

2

00

0

30%

25%

20%

15%

10%

5%

0%

Source: BIS, Consolidated International Banking Statistics

States will prefer rapid liquidity provision ifeconomic ties with the crisis-economy are dense,political interests are at stake, and domesticconditions are conducive to providing funds abroad.This policy will provide a quick recovery of the crisis-economy, benefiting the creditor, while moral hazardcosts will be borne over the long run by the entireinternational community. If these conditions areabsent, the creditor will have no particular incentiveto provide a rapid bailout and may use the crisis asan opportunity to extract concessions from the crisis-economy or allow conditions to deteriorate to providewarning signs against careless international lendingand irresponsible domestic policies.

In the case of the Asian Crisis, Japan leanedmuch further towards liquidity provisioncompared to the US and EU due to its highlyexposed banks and closer economic ties to theregion. Bank exposure is a case in point. Thefollowing chart shows the amount of outstandingprivate lending to Thailand from the US, EU, andJapan (See Diagram 2).26

26 Due to limitations on available data for lending to developed nations, the figures are provided in terms of percentage of lending to alldeveloping countries. Data for the EU does not include Greece and Luxembourg.

Diagram 1: The Liquidity Provision vs.Moral Hazard Preference Line

Moral Hazard Provide limited liquidity Stringent conditionality Encourage long-term reform

Liquidity Provision Abundant liquidity Soft or no conditionality Focus on short-termproblems



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n As the data indicates, Japanese exposure toThailand at the height of the crisis was extremelyhigh compared to that of the EU and the US,standing at around 25% of lending to all developingcountries. Japanese financial institutions also lent themost in absolute terms – around $38 billion comparedto $20 billion for the EU and $4 billion for the US.27

Thus, Japanese banks stood at the greatest risk in theevent of a major conflagration.

Japan also had very strong economic ties toThailand in the form of foreign direct investment andtrade. Japan is the largest foreigninvestor in Thailand in terms ofstock.28 Although the US and Japanaccount for about the same share oftrade with Thailand, Japanconsistently runs a trade surpluswhile the US runs a largetrade deficit, making Japanmore vu lnerab le to aneconomic s lowdown. Interms of bank exposure, FDI,and trade, the same generalpattern applied to broaderEast Asia on the verge of thecrisis, making Japan moresusceptible to the effects ofregional contagion.

It is interesting to note that this expositioncan be neatly reversed for the 1994 Mexico Crisis.US bank lending and economic ties to Mexicofar exceeded that of Japan. Consequently, USand Japanese preferences towards the liquidityprovision vs. moral hazard tradeoff during theMexican and Thai crises were reversed. In theMexico crisis, the US acted vigorously to organizean unprecedented and massive bailout packageamounting to $50 billion, while Japan stood aside,providing neither leadership nor liquidity.29 InThailand, the exact opposite outcome ensued, with

Japan taking leadership and pushing for a largebailout while the US stood aside.

Other possible explanations for the policydivergence include domestic politicalcircumstances and ideology. In Japan, thehistorical trend of providing large amounts ofOfficial Development Assistance (ODA) todeveloping countries, especially Asia, has createdan environment comparatively favorable to theprovision of credit abroad. Additionally, theInternational Bureau of MOF is literally down

the hallway from the MOFBudgeting Bureau, the primarybudgeting authority of Japan. Incontrast, the US Treasury mustface an unfavorably disposedCongress, and in 1994 theExchange Stabilization Fundwas tapped as an ad hoc slushfund to rescue Mexico. Thisenraged legislators in Congresswho subsequently imposedrestrictions on the use of theseunappropriated funds. Therestrictions only expired inSeptember 1997, in time for thebailouts of Indonesia and Koreabut too late for Thailand.30

Criticism and pressure from Congress continuedthroughout the Asian Crisis, and in 2000 theMeltzer Commission Report severely criticizedboth US and IMF policies during the crisis.31

Finally, while the Japanese Export-Import Bank(EXIM) can provide untied loans and other aidmeasures to countries in distress, US law prohibitsbalance-of-payment support through the EXIM.This severely constrains the policymaneuverability of the US government.32

In terms of ideology, one could make theargument that the US and the IMF subscribed to

27 Bank for International Settlements. Consolidated International Banking Statistics. February 2000. <http://www.bis.org/statistics/bankstats.htm> (8 May 2001).

28 Castellano, Marc. “Rapid Recovery in Southeast Asia Strengthens Japan-ASEAN Economic Relations.” Japan Economic Institute Report no.24a (23 June 2000). Pp. 3.

29 Kindleberger, Charles P. Manias, Panics, and Crashes. New York: John Wiley & Sons, Inc., 2000. Pp. 203.30 Krause, Lawrence B. The Economics and Politics of the Asian Financial Crisis of 1997-98. The Council on Foreign Relations, 5 June 1998.

<http://www.cfr.org/public/pubs/crisis.html> (19 May 2001).31 Calomiris, Charles W. “When Will Economics Guide IMF and World Bank Reforms?” CATO Journal 20, no. 1 (2000), 85-87.32 Hashimoto, Kohei, ed. Domestic Determinants of Japanese Foreign Policy. Kyoto: PHP Kenkyujo, 1999. Pp. 378-379.

ALTHOUGH THE US AND JAPANACCOUNT FOR ABOUT THE SAMESHARE OF TRADE WITH THAI-LAND, JAPAN CONSISTENTLYRUNS A TRADE SURPLUS WHILETHE US RUNS A LARGE TRADEDEFICIT, MAKING JAPAN MOREVULNERABLE TO AN ECONOMICSLOWDOWN. IN TERMS OF BANKEXPOSURE, FDI, AND TRADE, THESAME GENERAL PATTERN APPLIEDTO BROADER EAST ASIA ON THEVERGE OF CRISIS, MAKING JAPANMORE SUSCEPTIBLE TO THEEFFECTS OF REGIONAL CON-TAGION.

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a much more free market-oriented ideology thanthe Japanese financial authorities. Thus, theywere slow to acknowledge that short-termcapital market liberalization contributed to theAsian Crisis and pushed for domestic reformsthat would diminish the role of the public sector.The Japanese authorities, as epitomized bySakakibara, leaned towards supporting theAsian model of development and did not seesuch structural issues as lying at the heart ofthe crisis. Instead, prescriptions focused ongreater regulation through means such ascapital controls and better oversight over theinternational financial system. Explanationsfocusing on ideology, however, are complicatedby the fact that ideology itself may be shapedby alternative factors. The US, for example,may have touted its free-market ideology as ameans to secure liberalization favorable for itsown multinationals and financial corporations.Japan, on the other hand, may have subscribedto the Keynsian view of low interest rates ratherthan the IMF’s contractionary policies becauseit feared economic recession more thandevaluation in the crisis-economies – recessionwould harm local sales by Japanesemultinationals while devaluation, under certaincircumstances, would increase theircompetitiveness in world markets.

Both domestic politics and ideology,however, seem to provide a poor explanationof the asymmetrical responses exhibited duringthe Asian and Mexican crises. The US clearlysupported liquidity provision during theMexican Crisis and several sources suggest thatconditionalities were not strictly enforced.33

Japan, on the other hand, stood aside,apathetically providing virtually no support.The ideological explanation would seem toimply a relatively consistent reaction from bothcountries during both crises. Domestic politicsfails to explain Japanese quiescence during theMexican crisis – domestic conditions

consistently provided greater comparativemaneuverabili ty for Japanese financialauthorit ies. Self-interest based on thedistributive tradeoff between moral hazard andliquidity provision provides a more consistentexplanation. Thus, domestic politics andideology probably served as secondary factorsat best, augmenting but not overridingeconomic self-interest.

The AMF proposal emerged as a result ofthis preference divergence between Japaneseand US financial authorities and one additionalfactor – US domination of the IMF. The IMFwas created in 1945, in an era of unambiguousUS economic hegemony and Japanesedevastation, largely through a series ofcompromises between rival plans developed byHarry Dexter White of the US Treasury on onehand and by Lord Keynes of Great Britain onthe other.34 A wide range of literature hasaddressed the tendency for institutions toencapsulate and propagate conditions prevalentat inception.35 Japan’s position within the IMFhas been similarly limited, and United States’position strengthened, by path dependencieswithin the institution.

Several factors deserve attention. First,American preponderance has been locked in byvirtue of logistics. IMF headquarters have beenlocated in Washington, DC since the institutionwas created. The advantages for a host countryof supporting the headquarters of aninternational insti tution are immense,especially if located in the nation’s capital.Such advantages may include: 1) Easier andrapid access to the activities of the institutionin terms of research, data, and human capital;2) Opportunities for informal networkingamong members of the host country governmentand the international institution; 3) Ideologicalinfluence through immersion of the institution’sstaff in the host country’s academic,journalistic, and social sources of information.

33 Calomiris, Charles W. Statement Before the Joint Economic Committee, United States Congress. 24 February 1998. <http://www.house.gov/jec/hearings/imf/calomiri.htm> (19 May 2001).

34 Cohen, Organizing the World’s Money, 90.35 See, for example, Ruggie, John Gerard (Constructing the World Polity. New York: Routledge, 1998) and Goldstein, Judith ( “International

Law and Domestic Institutions: Reconciling North American ‘Unfair’ Trade Laws.” International Organization 50, no. 4 (Autumn 1996):541-564).



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n The close relationship between the US andthe Bretton Woods institutions gave rise tothe so-called “Washington Consensus” (notethe location-centered naming) espousingsound macro and liberal market policies asprerequisi tes to economic growth. TheJapanese f inanc ia l au thor i t i es haveconsis tent ly prefer red a more caut iousapproach that reins in rather than lets loosemarket forces, but their voices have beenmuted.36 Second, as the result of an earlycompromise, the managing directorship ofthe IMF has h is tor ica l lygone to a European national,and the US exercises a defac to ve to over themanaging d i rec tornomination.37 Third, IMFemployees still continue toconsist largely of US or UKnationals or people educatedin those countries, at theexpense of Japaneseinf luence . 38 F ina l ly,Japanese and Asian interestsa re severe lyunderrepresented in the IMFat the official level. Partly as a side effect ofthe AMF debacle, IMF quotas were increasedin 1998 and redistributed to better reflecteconomic rea l i t i e s . 39 P r io r to th i sredistribution at the onset of the Asian Crisis,Japan and Germany had the same share ofquotas at 5.6% and South Korea’s share stooddirectly below that of Libya.

Thus, the AMF can be seen as an attemptby Japan to overcome its inability to obtainpreferred policy outcomes via the IMF.Sakakibara ment ions severa l ins tances

dur ing which the Japanese au thor i t i esunsuccessfully lobbied the IMF to shift awayfrom severe austerity measures, especially inreference to Indonesia. In Indonesia, he saysthere were two options – 1) a “large” packagea iming to accompl i sh major s t ruc tura lreforms such as the elimination of wastefulnat ional projects , a major reduct ion ofsubsidies, and a rapid restructuring of thefinancial sector, or 2) a “small” packagefocusing on stabilization of the exchange ratethrough cooperative interventions in the

cur rency marke t . MOFsupported the second option,seeing large-scale reformunder President Suharto asunrealistic and believing theIMF should s tay ou t o fpo l i t i ca l and s t ruc tura lissues. The IMF ignored theJapanese position and wentahead wi th the “ la rge”package . 40 Japaneseauthorities also supportedcapital outflow controls likethe ones imposed byMalaysia in 1998 and also

used at the early stages of the Thai crisis,another policy the IMF refused to endorse.41

The Thai rescue package highlightedthese issues for two specific reasons. First,US non-par t i c ipa t ion in the packageincreased Japanese (and Asian) frustrationover the ability of the US to nonethelessobtain its preferred policy outcomes – harshconditionalities and long-term structuralre forms or ien ted towards marke tl ibera l iza t ion . Second, la rge b i la te ra lcommitments from Asia demonstrated that

36 Sakakibara, Nihon to Sekai ga Furueta Hi. One exception is the World Bank report on the Asian Growth Miracle published in 1993. SeeWorld Bank. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press, 1993.

37 Thacker, Strom C. “The High Politics of IMF Lending.” World Politics 52 (October 1999), 41-42.38 Ferguson, Tyrone. The Third World and Decision Making in the International Monetary Fund. New York: Printer Publishers, 1988. Pp.

92.39 International Monetary Fund. IMF Board Submits Resolution to Governors for 45 Percent Quota Increase. Press Release Number 97/63.

23 December 1997. <http://www.imf.org/external/np/sec/pr/1997/pr9763.htm> (8 May 2001).40 Sakakibara, Nihon to Sekai ga Furueta Hi, 196.41 Sakakibara, Nihon to Sekai ga Furueta Hi, 165.

. . . JAPANESE AND ASIANINTERESTS ARE SEVERELYUNDERREPRESENTED IN THEIMF AT THE OFFICIAL LEVEL.PARTLY AS A SIDE EFFECT OF THEAMF DEBACLE, IMF QUOTASWERE INCREASED IN 1998 ANDREDISTRIBUTED TO BETTER RE-FLECT ECONOMIC REALITIES.PRIOR TO THIS REDISTRIBU-TION AT THE ONSET OF THE ASIANCRISIS, JAPAN AND GERMANYHAD THE SAME SHARE OF QUOTASAT 5.6% AND SOUTH KOREA'SSHARE STOOD DIRECTLY BELOWTHAT OF LIBYA.

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the region could provide sufficient liquiditywithout relying on IMF resources:

Bilateral commitments to the Thai packageaccounted for 61% of the total funds (55.2%from Asian nations) compared to a mere23.3% provided by the IMF. Notably, thecontributing countries accounted for a mere12% of IMF quotas, far short of the US shareof 18%.

Thus, the Thai rescue package convincedJapanese financial authorities that the AMFidea was both feasible and in l ine withJapanese interests. The AMF would haveallowed Japan to shape policy outcomes moreeffectively in line with its preference towardseasy c red i t . 43 Japan and o ther As iancountries would gain greater leverage tosoften or change the focus of conditionalities.Additionally, the AMF could help provide a

grea ter headl ine f igure for the ba i loutpackage to calm markets and disburse fundsmore flexibly.

In order to make the AMF proposalpalatable to the US, however, Japanese policymakers claimed that the institution would actin sync with the IMF and not provide easycredit. This created a conundrum – if theAMF would not act autonomously of the IMF,its existence was moot, and increasing IMFquotas would have sufficed. Thus, to the eyesof many, the AMF proposal appeared half-baked and devoid of meaning. Sakakibaramentioned in an interview, however, that heindeed wanted to act independently andpursue policies different from the IMF.44

In turn, the United States opposed theAMF because i t s p re fe rences l ed i t toemphasize moral hazard concerns and itfeared that easy liquidity would allow Asianeconomies to postpone important domesticreforms. The US opted to maintain the IMF-centered approach through which it couldimpact policies much more effectively in linewith its own preferences. Thus, the ManilaFramework underscored the primacy of theIMF.

III. Conclusion – Prospects for an AMFAs this brief exposition demonstrates,

debates over the AMF proposal have revolvedaround distributive political issues ratherthan the quintessential question of economicefficiency. Economically, does an AMF makesense? There is no prima facie rationale forwhy the world should only have one Fund.Although serious academic work on thistopic is scarce, most criticisms focus on thepotential for the AMF to undermine IMFleadersh ip and prov ide over ly looseliquidity.45 As this paper has demonstrated,the definition of “overly loose” is relative.

42 Data available at http://www.imf.org and http://www.mof.go.jp (accessed 11/18/00)43 For a more detailed exposition on this point, see Hamada, Koichi. “From the AMF to the Miyazawa Initiative: Observations on Japan’s

Currency Diplomacy.” The Journal of East Asian Affairs XIII, no. 1 (Spring/Summer 1999), 33-50.44 Former MOF Official, Personal Interview, 20 September 2000.45 See, for example, Lewis, Jeffrey. “Asian vs. International: Structuring an Asian Monetary Fund.” Harvard Asia Quarterly. March 1999.

<http://www.fas.harvard.edu/~asiactr/haq/199903/9903a005.htm> (22 October 2000).

Table 1: Composition of the Thai Rescue Package by Source

JapanSingaporeAustraliaMalaysia

Hong KongChina

South KoreaBrunei

Indonesia

Total

Share of the Thai

Rescue Package

by Commit-ment (%)*

23.35.85.85.85.85.82.92.92.9

61.0

Voting Powerin IMF as

represented byQuota (%)

5.60.21.60.60.02.30.50.11.0

12.0

Source: IMF and Japanese Ministry of Finance42

*Remainder: IMF – 23.3%, WB – 8.7%, ADB – 7.0%



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n Institutional aspects of the IMF may in factbe conducive to underprovision of liquidityin Asia compared to the collectively optimalpoint. Koichi Hamada has demonstrated thatin theory, an AMF would ceteris paribus shiftthe regional norm towards greater liquidityprovision.46 Since there is some reason tobelieve that US inclinations towards moralhazard and Asian under-representation withinthe IMF currently skew the policy outcometowards underprovision, the AMF may in factrepresent an economically favorable solution.

What are the prospects for a future AMF?Although US/IMF opposition stymied the initialAMF proposal, Japan seems to be taking stepstowards eventualimplementation. Inlate 1998, when Japanunveiled the “NewMiyazawa Initiative,”a $30 bill ion aidmeasure to resuscitatethe crisis economies,$15 bill ion wasearmarked as short-term funds to be usedto provide temporaryliquidity to countriesunder crisis. In aclear break from IMForthodoxy, asignificant portion ofthese funds wasearmarked forMalaysia, a countrystubbornly resistingIMF dictates andimposing capitalcontrols. Building offof this tentativefoundation, in May

AMF

Japan

Individual Countries

Providing funds

RecipientCountry

1. AMF concept (Multilateral)

2. Existing cooperative framework between monetaryauthorities of Japan and other Asian countries

Japan

Malaysia

Republic of Korea

2000 Japanese Finance Minister KiichiMiyazawa introduced what has come to beknown as the “Chiang Mai Initiative.”47 Thisinitiative would “establish a network of bilateralswap and repurchase agreement facilitiesamong ASEAN countries, China, Japan, andthe Republic of Korea.”48 Although the officialstatement carefully mentions that the initiative“differs from creating a new multilateralinternational organization, like the AsianMonetary Fund (AMF),”49 the two initiativesshare identical goals – to help participatingeconomies avoid balance-of-payment crises bymaking emergency liquidity readily and easilyavailable.50

46 Hamada, “From the AMF to the Miyazawa Initiative.”47 Castellano, “Rapid Recovery in Southeast Asia Strengthens Japan-ASEAN Economic Relations.”48 Ministry of Finance (Japan). The Council on Foreign Exchange and Other Transactions, The Road to the Revival of the Asian Economy and

Financial System – Sustainable Growth in the 21st Century and Building of a Multilayered Regional Cooperative Network. 20 June 2000.<http://www.mof.go.jp/english/if/if022a.htm> (15 May 2001), Appendix 8 (6).

49 Ibid.50 Castellano, “Rapid Recovery in Southeast Asia Strengthens Japan-ASEAN Economic Relations.”

103Phillip Lipscy


Japan

MOF provides the chart on the followingpage to demonstrate the structural differencesamong the AMF, the short-term portion ofthe New Miyazawa Initiative, and the ChiangMai Initiative. This chart, however, may providea more convincing account of the similaritiesbetween the AMF and the Chiang Mai Initiativeas well as Japan’s use of the short-term portionof the New Miyazawa Initiative as a steppingstoneto expand the regional swap network (see Charts).

51 One former Japanese senior official suggests that this may be the most practical policy. Personal Interview, September 2000.

3. Financial cooperation recently agreed at the ASEAN 3Meeting (Bilateral Network)

J a p a n

RecipientCountry

IndividualCountries

BilateralAgreement

Source: MOF, The Road to the Revival of the Asian Economy andFinancial System

When implemented, the Chiang MaiInitiative would help shore up the foreignreserves of countries under crisis by allowingcur rency swaps be tween par t i c ipa t ingcountries. For example, if the baht cameunder pressure, the Thai government wouldbe able to tap the huge foreign currencyreserves of countries like Japan and Chinaand swap baht for dollars or yen or anotherkey currency. By virtue of its existence, theinitiative would provide a disincentive tospeculate against any protected currency.

Without observing future developments,definitive answers about whether the Chiang

Mai initiative will develop into a full-fledgedinstitution are difficult to provide. As itstands, however, the initiative is bound tobe plagued by collective action problemsunder a highly ambiguous and decentralizeddecision-making structure. Reliance on IMFleadership and surveillance may serve as atemporary so lu t ion , bu t ca l l s fo rcentralization resembling an AMF are boundto emerge f rom count r ies unfavorab lyinc l ined towards the Bre t ton Woodsinstitutions (most notably Malaysia).

However, the distributive nature of theliquidity provision vs. moral hazard tradeoffat the international level necessarily biasesthe US and the EU against the creation of anAMF. The US would prefer not to seestructural reforms in Asia postponed furtherand is disinclined about giving up the globalleverage that comes with domination over asingle Fund. One solution would be todepoliticize the IMF or alter the decision-making structure to be more conducive toAsian influence. Alternately, an AMF could

be c rea ted wi th astructure similar tothe ADB – the USand EU na t ionswould be included,but power would beshared more equallythan the status quoin the IMF.51 Thesesolutions would bothrequi re a g rea te rwil l ingness on thepar t o f the US toa l low for As ianinf luence in theevent o f a fu turecrisis in the region.The preced ingana lys i s ind ica testhat the US will be



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n d i s inc l ined towards these so lu t ions .However, in the context of he ightenedhos t i l i ty towards the IMF/US in As iafollowing the Asian Crisis and a much moreassertive Japanese financial policy, the USmay increas ing ly f ind such inclusivecompromise solutions more palpable. The IMFwill continue to be important in terms of

facilitating the unified involvement of creditornations during major international crises.However, an AMF or a similar arrangementmay be more effective in dealing with regionalcontingencies that tend to bias the USexcessively towards moral hazard concernswithout allowing the Asians to assume greaterdecision-making influence over the IMF.

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