The headquarters of the Bank of Japan in Tokyo on October 27, 2022. The Japanese central bank’s monetary policy has come under criticism by the International Monetary Fund despite appearing more responsible than that of other members. Photo: AFP
Opinion
Macroscope
by Anthony Rowley
Macroscope
by Anthony Rowley
Western hypocrisy over Japan’s sensible monetary policy shows Asia needs its own IMF
The IMF has learned nothing from its failures in the 1997 Asian financial crisis and continues to try to dictate how Asian countries pursue their interests
Asia needs greater autonomy to make its own financial decisions without Western meddling, but better China-Japan cooperation is needed for that to happen
The International Monetary Fund (IMF) is at it again, lecturing Asian countries on how they should run their monetary, fiscal or other policies despite the fact that the actions of certain key IMF member states are at least partly responsible for the distressed state of the global economy.
This time, the specific target of the “policy advice” is Japan, or more specifically the Bank of Japan (BOJ). The IMF has never been shy about telling Asian countries what they need to do, only to incur criticism later for its actions.
In a report on the latest of its Article IV consultations with Japanese authorities, the IMF advised the BOJ that “to better manage risks given increased uncertainty regarding inflation, more flexibility in longer-term yields should be considered”. This might sound too technical to be of interest to anyone beyond the confines of academia, yet by mentioning it the IMF stepped into a minefield of controversy over whether monetary policy should be officially determined or left to the marketplace.
This issue is better discussed in detail elsewhere, but the irony is that central banks in the United States, Britain and other Western members of the IMF first let inflation rip and then choked it off suddenly, risking global recession. Despite this, Japan is being castigated for behaving more responsibly.
Japan is not suffering from the kind of inflation that has wreaked havoc on Western economies in recent times. In fact, deflation or disinflation has long been the main problem in Japan, yet the IMF still feels free to tell Japan how to behave.
In recent months, the BOJ has been in a pitched battle with investors and speculators that are determined to force Japan’s interest rates and currency into line with those of nations where prudent monetary policy has been abandoned.
02:07
Japanese yen plunges to 32-year low as government steps in to prop currency
Japanese yen plunges to 32-year low as government steps in to prop currency
There are strong shades here of the situation at the time of the Asian financial crisis in 1997. Then as now, the IMF first promoted freedom of international capital flows and then gave bad advice on dealing with the consequences.
The crisis saw regional currencies appreciate steeply in value on the back of strong capital inflows only for them to come under attack by hedge funds, which then-Malaysian Prime Minister Mahathir Mohamad saw as the villains behind the crisis.
The Thai baht, Indonesia rupiah and Korean won duly collapsed. Those Asian nations that had taken advantage of huge capital flows promoted by the IMF were unable to repay their US dollar-denominated debts and thus ran into severe balance of payments crises.
The IMF then took more direct action, making loans to the distressed countries on the condition they adopt its economic policy prescriptions, forcing them into recession. The rest is history, but respect for the IMF sank to a low ebb in much of Asia.
Another irony is that Eisuke Sakakibara, who was then Japan’s vice-minister of finance for international affairs, criticised the IMF for its misguided policy advice. Haruhiko Kuroda, who was then Sakakibara’s deputy and is now governor of the BOJ, is by virtue of his position the target of IMF criticism.
Haruhiko Kuroda, governor of the Bank of Japan, speaks during a panel session on the closing day of the World Economic Forum in Davos, Switzerland, on January 20. Photo: Bloomberg
Alarmed at calls from Sakakibara and others for more Asian regional autonomy in monetary affairs, the IMF acknowledged policy errors and set about repairing relations with the region. In December 1997, the year in which the Asian financial crisis emerged, the IMF opened a Regional Office for Asia and the Pacific in Tokyo to support “regional cooperation to bring sustainable growth in this rich and diverse region through policy dialogue, capacity development and outreach work”.
That gave Asia more direct communication with the IMF, but the voice and policy prescriptions of the institution continued to emanate from the ivory tower of the IMF headquarters. Efforts since then to gain more Asian independence have met with limited success.
The concept of an Asian IMF became watered down as the Asian financial crisis receded, and it materialised in May 2000 as simply the Chiang Mai Initiative. It was a bilateral currency swap agreement among Asean states plus three nations, later converted into a multilateral swap arrangement in the form of a “multilateralised” Chiang Mai Initiative.
An equally diluted move to give Asia more autonomy in economic and monetary policymaking was the founding of a regional surveillance unit linked to the multilateralised initiative. The unit, known as the Asean+3 Macroeconomic Research Office and founded in Singapore in April 2011, is far from being an Asian IMF.
This brings us to why more regional autonomy is needed. Key monetary policy and other decisions that affect Asia and other regions are taken not within those regions and often endorsed in the West via the IMF. The US Federal Reserve’s monetary policy has reverberated around the world in the form of rising interest rates and in currency markets through US dollar appreciation, but Japan’s attempts to maintain an independent policy have come under attack.
China has preserved monetary independence by controlling its rate of opening up to potentially destabilising inflow and outflows of foreign capital. By launching the Asian Infrastructure Investment Bank, China effectively challenged the policies of the World Bank, the IMF’s sister institution.
A more muscular form of Asian IMF would enable key Asian nations to more effectively coordinate monetary and other economic policies in a way that better serves their own interests rather than those of outside powers. First, though, this requires improved Japan-China cooperation.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
