Download -63- Section 5 “Imbalance” in the world economy Section 5 Key

Section 5 “Imbalance” in the world economy
<Section 5 Key points>
¾
The imbalance in the current account balances in the 21st century is expanding to record levels, as is
evident from the over-concentration of the current account deficit in the U.S. and the expansion of the
current account surpluses in East Asia as well as in the rest of the world with the exception of the U.S.
¾
The underlying causes of the imbalance concern the expansion of production and export bases in East
Asia, which has resulted in economic growth dependent on foreign demand. The imbalance of the current
account balances in East Asia is also illustrated by the expansionary trend of the region’s foreign exchange
reserves. In terms of capital flow, it appears that the capital acquired through current account surpluses is
channeled back into the U.S. and other developed countries by being invested into low-risk assets
including U.S. Treasury bonds.
¾
While at this moment we cannot immediately envisage a situation in which the U.S. current account
deficit cannot be promptly financed, it is true that its size is raising concerns about its sustainability. In
order to overcome these concerns, it is necessary to achieve a sustainable and self-reliant economic
growth in the East Asian region and shift from a unipolar structure dependent on U.S. consumption to a
multi-polar structure including East Asia and Europe.
1. World economic trends and the over-concentration of the current account deficit in the U.S., from an
international balance of payments perspective
(1) Trends in the international balance of payments
This section will examine the “expansion of the imbalance of the current account balances,” an
acknowledged risk factor of the world economy in recent years.
Figure 1.5.1 displays the trends in the current account balances by major countries and regions of the world
economy. The figure shows that as the U.S. current account deficit expands, so does the current account
surpluses of ten East Asian countries and regions, including Japan, NIEs, ASEAN4 and China. When the
imbalance of the current account balances was drawing a lot of attention back in the 1980s, the overall situation
was described in terms of the U.S. current account deficit and the Japanese current account surplus. In the 21st
century, however, the imbalance is ascribed to the over-concentration of the current account deficit in the U.S.
and the expansion of the current account surpluses in East Asia as well as in the rest of the world with the
exception of the U.S.1 The growth engines driving the expansion of the world economy in the 21st century are
the expansion of production and exports in the East Asian region, especially in China, as well as U.S.
consumption and imports. Consequently, as illustrated in this figure, this new form of imbalance of the current
account balances caused by the enormous U.S. current account deficit and the surpluses of entire East Asia is
expanding into one of unprecedented size. The risks implicit in the two growth engines—the U.S. and Chinese
economies—are both as described in earlier sections, and in this section, we will consider the expansion of the
imbalance of the current account balances, a potential as well as structural risk.2
1
2
Yoshitomi (2004).
It is possible that the rise of BRICS and high resource prices noted in earlier sections are also contributing to the
-63-
($ billion)
Figure 1.5.1
600
Trends in global current account balances
400
200
0
-200
-400
-600
US
EU
Japan
NIEs
ASEAN4
China
BRICS (excluding China)
Others
-800
1980
1985
1990
1995
2000
2005
Source: World Economic Outlook Database September 2004 (IMF).
(2) Financing of U.S. current account deficit
The imbalance of the current account balances is sustainable as long as it can be financed by international
capital. If we look at the other side and examine the large U.S. current account deficit and East Asia’s current
account surpluses from the perspective of international capital flows, we see that the imbalance is nothing more
than a mechanism of capital being exported from East Asia to the U.S. As shown in Figure 1.5.2, portfolio
investment and other investment are sufficiently financing the U.S. current account deficit in terms of size.
With regard to direct investment, however, the U.S. is a capital exporter. Aiming to further increase the rate of
return on capital not used to finance the current account deficit, the U.S. channels the capital back into overseas
countries in the form of direct investment.
expansion of the imbalance of the current account balances.
-64-
($ billion)
800
Figure 1.5.2　United States: Trends in balance of payments
600
Errors and
omissions
400
Reserve assets
200
Inflow
↑
0
↓
Outflow
Other investment
balance
Portfolio
investment balance
-200
Direct investment
balance
-400
Other capital
account balance
-600
Current account
balance
-800
1990
1992
Source: IFS (IMF).
1994
1996
1998
2000
2002
2004
Basic balances
(3) International balance of payments and capital flows in East Asia
Similarly, we take a look at the capital flow situation of nine East Asian countries and regions (NIEs,
ASEAN4, China) excluding Japan from Figure 1.5.3. Although the current account balances of the entire
aforementioned region were in deficits in 1995 and 1996 prior to the Asian currency and financial crisis
(hereinafter referred to as “Asian crisis” in this section), the crisis was a turning point for establishing a surplus
trend, which has been on an upturn since 2000. On the other hand, there was a great deal of capital inflow with
respect to the financial account balance prior to the crisis, with surpluses in all three items of direct investment,
portfolio investment and other investment. However, the outbreak of the Asian crisis led to excess outflow of
other investment and a deficit trend for the entire financial investment balance. And from 2001 and onwards,
direct investment inflows are being maintained, while the entire financial account balance is back to a surplus
due to a gradual decline in the outflow amounts from portfolio investment and other investment. These sorts of
circumstances largely contribute to rising foreign exchange reserves, and in East Asian countries and regions,
the capital flow commensurate with the surplus portion of the current account balances is leading to a rise in
foreign exchange reserves, which are on an expansionary trend. Furthermore, in recent years, the portion of the
financial investment balance that turned into a surplus is contributing to rising foreign exchange reserves.
-65-
($ billion)
300
Figure 1.5.3 Trends in international balance of payments in East Asian
countries and regions (excluding Japan)
200
Errors and omissions
Reserve assets
Financial derivatives
100
Inflow
↑
0
↓
Outflow
Other investment
balances
Portfolio investment
balance
Direct investment
balance
-100
Other capital account
balance
Current account
balance
-200
Basic balance
-300
1990
1992
1994
1996
1998
2000
2002
2004
Notes: The graph shows the total value of balance items for each country and region.
Source: IFS (IMF), Central Bank of China (Central Bank of China (Taiwan)), Fukui (2003).
(4) Changes in capital flows among major regions
Next, we examine the capital flows among each region. Figure 1.5.4 is a four-legged graph that illustrates
the trends in capital flows of the U.S., Europe, Japan, and East Asia (excluding Japan), respectively, for 1996
and 2003 based on international balance of payments. According to this figure concerning the U.S. capital
inflows, the U.S. current account deficit in 1996 was approximately US$120.2 billion, whereas the U.S. had
inflows of US$101.4 billion from Europe and US$63.4 billion from Japan and outflows of US$500.0 million
to East Asia (excluding Japan) in terms of financial investment balance. In other words, European and Japanese
capital exports to the U.S. alone exceed the amount of the U.S. current account deficit. In 2003, however, the
current account deficit was approximately US$530.7 billion, whereas inflows were US$36.6 billion from
Europe, US$80.8 billion from Japan and US$139.1 billion from East Asia (excluding Japan). Therefore, from
1996 to 2003, the rapidly expanding U.S. current account deficit was also financed by capital from other
countries and regions, with capital from East Asia including Japan largely contributing to the financing of the
U.S. current account deficit. During this period, the East Asian economy achieved rapid economic growth in
spite of the Asian crisis, and international capital flows also demonstrate the expanding presence of the East
Asian economy.
-66-
Figure 1.5.4 International flow of funds (1996, 2003)
（Unit: $100 million)
US
1996 2003
Current Account Balance ▲1,202⇒▲5,307
Capital and Financial
Account Balance
1,304⇒ 5,412
1996
2003
1996
US→Asia
US→Japan Japan→US US→Japan Japan→US
Direct Investment
Portfolio Investment
Other Investment
Total
Financial
Investment Blance
▲3
58
▲ 36
19
133
95
425
653
58
320
221
599
634
65
▲ 55
1,397
1,407
808
1996
Direct Investment
Portfolio Investment
Other Investment
Total
Financial
Investment Blance
2003
Asia→Japan Japan→Asia Asia→Japan Japan→Asia
Direct Investment
Portfolio Investment
Other Investment
Total
Financial
Investment Blance
4
33
▲ 30
7
97
21
▲5
113
106
Japan
1996 2003
Current Account Balance 658⇒ 1,362
Capital and Financial
Account Balance
▲313⇒ 679
4
▲1
▲ 179
▲ 176
50
▲5
▲ 383
▲ 338
2003
Asia→US
138
251
139
528
▲7
50
480
523
US→Asia
1996
US→EU
Asia→US
159
120
119
398
▲5
▲3
448
1,344
1,789
1,391
Direct Investment
Portfolio Investment
Other Investment
Total
Financial
Investment Blance
362
733
748
1,843
2003
EU→US
531
605
1,721
2,857
US→EU
EU→US
814
145
862
1,821
115
1,077
995
2,187
1,014
366
East Asia (excluding Japan)
1996 2003
Current Account Balance ▲219⇒1,646
Capital and Financial
Account Balance
971⇒ 124
N.A.
▲ 162
1996
2003
EU→Japan Japan→EU EU→Japan Japan→EU
Direct Investment
Portfolio Investment
Other Investment
Total
Financial
Investment Blance
8
660
▲ 349
319
32
224
▲ 252
4
▲ 315
54
430
75
559
80
729
▲ 898
▲ 89
▲ 648
E.U.(15)
1996 2003
Current Account Balance 861⇒ 578
Capital and Financial
Account Balance ▲55⇒ ▲809
Notes: 1. US Department of Commerce data used for investment balance for US-Japan, US-East Asia and US-EU; Bank of Japan data used for Japan-East Asia, Japan-EU.
2. The US-East Asia data was obtained by subtracting the “South Africa” data from “Other countries in Asia and Africa” data.
3. “Other investment” of Japan-East Asia and Japan-EU was obtained by aggregating “Other investment” data and “Financial derivatives” data.
4. The value for current account balance and capital and financial account balance for East Asia (excluding Japan) and EU (15) was the aggregate of each country’s value in the IFS.
Source: IFS (IMF), U.S. International Transactions Accounts Data (US Department of Commerce), Regional Balance of Payments (Bank of Japan), Central Bank of China (Republic of China
(Taiwan) )Website, Fukui (2003).
2. Rising foreign exchange reserves in East Asia
(1) Rapidly rising foreign exchange reserves in East Asia
As stated earlier, East Asian foreign exchange reserves are increasing significantly in tandem with the
expansion of its current account surplus. Here, we examine the foreign exchange reserves in East Asia. Figure
1.5.5 illustrates the trends in foreign exchange reserves of East Asian countries and regions. The figure shows
that foreign exchange reserves are rapidly increasing, with those of China nearly tripling over a three-year
period from the end of 2001 to the end of 2004.
-67-
($ billion)
Figure 1.5.5 Trends in foreign exchange reserves in East Asian countries and
region (excluding Japan)
600
500
400
China
South Korea
Taiwan
Hong Kong
Singapore
Thailand
Malaysia
Philippines
Indonesia
300
200
100
0
1990
1992
1994
1996
1998
Sources: IFS (IMF), Central Bank of China (Central Bank of China (Taiwan)).
2000
2002
2004
In addition, Figure 1.5.6 illustrates the ratio of East Asia’s foreign exchange reserves to global foreign
exchange reserves. At the end of 2004, the total foreign exchange reserves of ten East Asian countries were
roughly US$2.3 trillion, which account for approximately 59% which is more than half of the global foreign
exchange reserves. Relative to economic size, the level of the current account surplus and foreign exchange
reserves of East Asian countries and regions excluding Japan far exceeds that of Japan. For example, in 2003,
while the current account surplus to GDP ratio was roughly 3% in Japan, Singapore had a high ratio of 30% as
well as other countries including Hong Kong, Taiwan and Malaysia recording over 10%. With respect to
foreign exchange reserves also, while Japan holds the most foreign exchange reserves in the world, its foreign
exchange reserves to GDP ratio is roughly 18%. In contrast, there are quite a number of other East Asian
countries and regions with foreign exchange reserves to GDP ratio of over 30% (Table 1.5.7).3
3
Yoshikuni (2003).
-68-
（$ billion）
4,000
3,500
3,000
Figure 1.5.6 East Asia: Trends in foreign exchange reserves
Global foreign exchange reserves （end of 2004）
Foreign exchange reserves Of total global reserves
（$ billion）
（％）
Japan
833.9
21.6%
NIEs
676.5
17.6%
ASEAN4
162.9
4.2%
China
614.5
15.9%
East Asia Total
2,287.8
59.4%
World Total
3,853.7
100.0%
2,500
2,000
1,500
1,000
ASEAN4
China
Others
NIEs
500
Japan
0
1980
1982
1984
1986
1988
1990
1992
Source: IFS (IMF), Central Bank of China (Republic of China (Taiwan)) Website.
1994
1996
1998
2000
2002
2004
Table 1.5.7 Size of foreign exchange reserves and current account balances (percent of GDP)
(%)
Current account balance/percent of GDP
Foreign exchange reserves/percent of GDP
1996
2003
1996
2004
South Korea
-4.16
2.04
6.10
29.24
Taiwan
3.91
10.23
31.48
79.16
Hong Kong
10.68
40.75
75.05
Singapore
15.07
30.86
83.34
105.06
Thailand
-8.07
5.56
20.74
32.28
Malaysia
-4.42
12.97
26.78
56.36
Philippines
-4.77
4.16
12.11
14.95
Indonesia
-3.37
3.62
8.03
13.57
China
0.89
3.25
13.11
37.26
Japan
1.40
3.17
4.62
17.87
Source: IFS (IMF), Key Indicators 2004 (ADB), Central Bank of China (Central Bank of China (Taiwan)),
Foreign Economic Data (Cabinet Office).
(2) Investment of foreign exchange reserves4
How are rapidly expanding foreign exchange reserves being invested? Using data from the International
Monetary Fund (IMF), among other sources, we can ascertain the investment composition ratio by currency
and the ratio of portfolio investment (Table 1.5.8 and Table 1.5.9). From the tables, we can see that 59.3% or
nearly 60% of the foreign exchange reserves in developing countries, which include many East Asian countries
and regions, were denominated in US dollars in 2003. Moreover, an increase in the ratio of Euro-denominated
foreign exchange reserves is also witnessed in recent years. Next, if we look at the ratio of portfolio investment,
we can see that foreign currency securities make up a relatively large share of 60-90% of the foreign exchange
4
Shimizu and Murata (2005).
-69-
reserves in East Asian countries and regions.
Table 1.5.8 Trends in foreign reserves composition ratio by currency
(Unit: %)
Total for all member countries
2000
2001
2002
2003
US $
66.6
66.9
63.5
Japanese yen
6.2
5.5
5.2
British pound
3.8
4.0
4.4
Swiss franc
0.5
0.5
0.6
Euro
16.3
16.7
19.3
Others
6.6
6.4
7.1
Notes: The data is based on IMF member countries.
Source: IMF Annual Report 2004 (IMF).
63.8
4.8
4.4
0.4
19.7
6.8
Total for developed countries
2000
2001
2002
72.5
6.3
2.0
0.2
17.2
1.8
72.7
5.6
1.8
0.3
17.5
2.1
Total for developing countries
2000
2001
2002
2003
69.1
4.6
2.2
0.6
21.3
2.2
70.8
4.0
1.7
0.2
20.9
2.3
62.2
6.1
5.1
0.7
15.6
10.2
62.9
5.4
5.4
0.6
16.2
9.4
59.8
5.5
5.8
0.6
17.9
10.4
2003
59.3
5.2
6.2
0.6
18.9
9.8
Table 1.5.9 Ratio of foreign currency securities in foreign exchange reserves for East
Asian countries and regions (end of 2004)
Japan
Foreign reserves (a)
844,543
South Korea Hong Kong Singapore
199,066
123,569
Thailand
112,808
49,832
(Unit: $ million)
Malaysia Philippines Indonesia
66,209
16,029
36,320
Foreign currency
699,398
167,430
113,269
100,717
34,755
45,382
8,932
27,476
securities (b)
Percentage of portfolio
82.8%
84.1%
91.7%
89.3%
69.7%
68.5%
55.7%
75.6%
management (%) (b/a)
Notes: The table used the data from the end of 2004 based on the Special Data Dissemination Standard from the IMF website.
Source: Each country's central bank website.
We can thus deduce that foreign reserves are also reserve assets by nature and are invested primarily in
highly safe and liquid U.S. dollar-denominated assets including U.S. Treasury bonds. Table 1.5.10 shows a
breakdown of U.S. Treasury bonds held overseas by country. In 2004, seven East Asian countries and regions
held a total of US$1.1291 trillion worth of U.S. Treasury bonds, more than double what they held in 2000. If
we assume that the share of U.S. Treasury bonds held by the public sector is equivalent to the world average of
approximately 60%, this would mean that an enormous sum of capital totaling approximately US$680.0 billion
is invested in U.S. Treasury bonds. It is believed that a considerable amount of investment capital from foreign
exchange reserves is included in the sum.
From the above assessment of the foreign exchange reserves’ investment patterns, we can extrapolate that
the capital acquired from the current account surplus is invested in low-risk assets that are highly safe and
liquid such as U.S. Treasury bonds through foreign exchange reserves. One way of looking at the situation is
that foreign exchange reserves are in the end financing the U.S. current account deficit. This view is also
consistent with the trend demonstrated from international capital flows that we stated earlier.
Table 1.5.10 Trends in US Treasury Bond reserves in East Asian countries and regions
2000
Percentage (%)
2001
China
60.3
5.9%
78.6
South Korea
29.6
2.9%
32.8
Taiwan
33.4
3.3%
35.3
Hong Kong
38.6
3.8%
47.7
Singapore
27.9
2.7%
20.0
Thailand
13.8
1.4%
15.7
Japan
317.7
31.3%
317.9
521.3
51.3%
548.0
Total of seven countries and regio
Total of foreign reserves
1,015.2
100.0%
1,040.1
Foreign public sectors
609.2
60.0%
619.4
Source: Treasury Bulletin (US Ministry of Finance), Fukui (2003).
2002
118.4
38.0
37.4
47.5
17.8
17.2
378.1
654.4
1,238.6
763.1
-70-
2003
157.7
62.9
51.4
49.8
21.3
11.7
551.4
906.2
1,525.7
938.2
(Unit: $ billion)
2004 Percentage (%) 2004/2000 (times)
193.8
10.0%
3.21 times
69.0
3.6%
2.33 times
58.8
3.0%
1.76 times
52.7
2.7%
1.37 times
28.0
1.4%
1.00 times
15.0
0.8%
1.09 times
711.8
36.8%
2.24 times
1,129.1
58.3%
2.17 times
1,935.9
100.0%
1.91 times
1,172.9
60.6%
1.93 times
(3) Foreign exchange reserves5
Foreign exchange reserves refer to “capital to be used by monetary authorities for exchange intervention as
well as reserve assets to be used when the repayment of foreign currency-denominated debt to other countries
is difficult due to currency crises, etc., (Bank of Japan website).” In other words, to a certain degree
accumulation of foreign exchange reserves is believed to be necessary for currency stabilization in that country.
East Asian countries and regions in particular have a history of advancing foreign exchange reserve
accumulation to insure against a currency crisis, having experienced a large shock, namely the Asian crisis. As
such, the following paragraph will consider the size of rapidly increasing foreign exchange reserves in East
Asian countries and regions in recent years.6
Given that there are various theories on the optimum level of foreign exchange reserves and that a uniform
indicator does not necessarily exist,7 in this paragraph the optimum level will be introduced in reference to
comparisons with import value and short-term debt which are also analyzed by the IMF (2000), among others,
to evaluate foreign exchange reserves from a practical perspective. 8 First, the “foreign exchange
reserves/import value” illustrates for approximately how long foreign exchange reserves are able to finance
imports, and as a rough measure, it is indicated that more than three-months worth of imports is necessary. In
this respect, the figures expressing the import value ratio in Table 1.5.11 are increasing overall compared to
immediately before the outbreak of the Asian crisis, with the ratio greatly exceeding the three-months worth of
imports, the ratio being more than six-months for countries other than the Philippines and Hong Kong.9
Secondly, the “foreign exchange reserves/short-term debt” illustrates the ability of foreign exchange reserves to
finance the debt whose payment will be due in a year in which external financing becomes difficult, and one
year is used as a benchmark.10 As we can see from the figures, while there were a sparse number of countries
and regions whose foreign exchange reserves were well below their short-term debts in 1996, as of 2003, the
foreign exchange reserves of all countries and regions were over 1.0 times the short-term debts. In fact, all
countries and regions excluding the Philippines achieved ratios of over 1.5 times, and we can therefore infer
that the short-term debt ratio is largely improving.
5
This section is particularly based on Otani and Watanabe (2004).
A theoretical study of foreign exchange reserves includes the buffer stock model, a decision theory of optimal
foreign exchange reserves (Otani and Watanabe (2004)).
7
According to Yoshikuni (2003), there is no agreement on the optimal level of foreign exchange reserves even
among experts.
8
Aside from import value and short-term debt, the IMF (2000) gives “foreign exchange reserves/money supply,”
etc., as an indicator illustrating the impact of capital flight initiated by residents as an evaluation method.
9
According to IMF (2000), as a rough measure, the ratio of “foreign exchange reserves/import value” must be at
least three months.
10
IMF (2000) points out that while it defines the benchmark for the ratio of “foreign exchange reserves/short-term
debt” to be 1.0 times, this is not absolute given that Malaysia suffered from the Asian crisis in spite of having a high
ratio of 1.5 as of 1997. Also refer to IMF (2003).
6
-71-
Figure 1.5.11 The ratio of foreign exchange reserves to import value and to short-term external debt
Foreign exchange reserves ($ million)
1996
2002
2003
2004
Countries which experienced the Asian financial crisis
Korea
34,037 121,345 155,284 198,997
Thailand
37,731 38,046 41,077 48,664
Malaysia
27,009 34,222 44,515 66,384
Philippines
10,030 13,136 13,457 12,917
Indonesia
18,251 30,971 34,962 34,952
Other East Asian countries and regions
China
107,039 291,128 408,151 614,500
Taiwan
88,038 161,656 206,632 241,738
Hong Kong
63,808 111,896 118,360 123,540
Singapore
76,847 82,021 95,746 112,232
Foreign exchange reserves/import value
(number of months)
Foreign exchange reserves/short-term
debt (multiple of increase)
1996
2002
2003
2004
1996
2002
2003
2.7
6.3
4.1
3.7
5.1
9.6
7.1
5.2
4.4
11.9
10.4
6.6
6.4
4.3
12.9
10.6
6.1
7.6
3.8
9.1
0.46
0.76
2.03
1.11
0.49
2.59
3.38
3.16
1.60
2.00
2.74
3.55
3.74
1.12
2.23
9.3
10.3
3.9
7.0
11.8
17.2
6.5
8.5
11.9
19.5
6.1
9.0
13.1
17.3
5.5
8.2
3.34
4.32
0.36
0.43
10.23
10.12
1.91
1.38
10.16
7.42
1.64
1.58
Notes: 1. The foreign exchange reserves are figures for the end of each year from the IFS (IMF) and Central Bank of China (Republic of China
(Taiwan)) Website.
2. Import value is 1/12 of the import value data for the reference year from the Foreign Economic Data (Cabinet Office).
3. Short-term external debt which is due within a year is based on the Joint-BIS-IMF-OED-World Bank Statistics on External Debt. Specifically,
it sums the stock data of “Liabilities to banks,” “Debt securities issued abroad,” and “Non-bank trade credits” (at end of the year.)
The figures for 2004 have not been disclosed (as of April, 2005).
Source: Statistics on External Debt (Joint BIS-IMF-OECD-WB), IFS (IMF), Central Bank of China (Republic of China (Taiwan)) Website,
Foreign Economic Data (Cabinet Office).
3. Implication of expanding current account surplus in East Asia
The Asian crisis triggered the current account surpluses in East Asia, and they are on a further expansionary
trend even now when seven to eight years have passed since the crisis. One underlying factor is the weak
exchange rates in East Asian countries and regions compared to pre-crisis rates11 (Figure 1.5.12 and Figure
1.5.13). East Asian countries and regions shifted to a floating exchange rate regime following the Asian crisis,
and in some respects, their dollar buying intervention aimed at stabilizing their exchange rates against the dollar
resulted in the accumulation of foreign exchange reserves.12 Also, on the other hand, IS balance theory
supposes that the size of current account balances is always equivalent to the difference in savings and
investment amounts of that country, and so the Asian crisis also triggered changes in the savings and
investment balance of East Asian countries and regions. Hence, another import cause of the current account
surplus is the shift from excess investment to excess savings in East Asian countries and regions.13 This point
will be further elaborated in Section 4, Chapter II.
11
Yoshitomi (2004) indicates that the weakening real effective rates in the face of good fundamentals in East Asia is
one factor leading to the current account surpluses.
12
The Ministry of Finance (2002) and Fukuda and Hakari(2001) point out that the shift to a floating exchange rate
regime raises the linkage between the exchange rates of East Asian countries and regions and the U.S. dollar.
13
Fukui (2003).
-72-
（1996=100）
50
Figure 1.5.12 Trends in nominal currency exchange rate
Korean wong
Hong Kong dollar
Thai baht
Philipino peso
Japanese yen
Taiwan dollar
Singapore dollar
Malaysian ringgit
Chinese yuan
Indonesian rupiah (right scale)
▲ 50
Chinese yuan
Hong Kong dollar
100
150
100
Strong currency
（Weak
dollar）
↑
↓
（Strong
dollar）
Weak currency
250
200
400
250
1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1
Notes: For US$1 for each currency value, the values are indexed with 1996 being 100 for every quarterly average.
Source: Bloomberg.
550
（1996=100）
Figure 1.5.13　Trends in real effective exchange rates
125
100
75
50
25
1995Q1
Currency
appreciation
↑
↓
Currency
depreciation
1996Q1
1997Q1
1998Q1
1999Q1
Korean wong
Taiwan dollar
Hong Kong dollar
Singapore dollar
Thai bahts
Malaysian ringgit
Philippion peso
Indonesian rhupia (right scale)
Chinese yuan
Japanese yen
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
Notes: The data is indexed with 1996 being 100 by calculating quarterly averages from every monthly average.
Source: JP Morgan Index (JP Morgan website).
-73-
In summary, the economic growth of East Asian countries and regions is largely contributing to the
expansion of the imbalance of the current account balances in the 21st century. The expansion of production
and export bases in East Asian countries and regions has resulted in economic growth dependent on foreign
demand and is identified as one of the causes of the expansion of the imbalance of the current account balances
in the 21st century. The imbalance in East Asian countries and regions is clearly illustrated by the expansionary
trend of foreign exchange reserves, and in terms of capital flow, the capital acquired from current account
surpluses is channeled back into the U.S. and other developed countries by being invested into low-risk assets
including U.S. Treasury bonds.
As for the outflow of East Asia’s foreign exchange reserves to developed countries’ low-risk assets, one
argument is that East Asian countries and regions are investing their foreign exchange reserves in developed
countries’ safe assets with low rates of return out of necessity, as the capital markets in their country or region
are not developed. Therefore, it is argued, the outflow is the difference in terms of the country’s or region’s rate
of return on risky assets that these countries and regions can normally enjoy and they are compelled to pay this
amount to developed countries in the form of a certain premium (Fukui (2003)). Meanwhile, it is pointed out
that the savings of East Asia are not leading to the mid- to long-term investment capital that is necessary for
economic development. As a solution to these concerns, it is important to develop a capital market within the
region, among other measures, and in order to overcome these challenges, the Asian Bond Market Initiative
(ABMI) and the Asian Bond Fund (ABF) initiative are being proposed. In addition, international cooperative
initiatives including the Chiang Mai Initiative which is being advanced in East Asia may be considered as an
effort to reduce the desired level of foreign exchange reserves in East Asian countries and regions. Chapter III
will again take a look at these regional initiatives aimed at economic cooperation.
This section showed that the current U.S.-led growth mechanism of the global economy is resulting in the
imbalance of the current account balances. As stated earlier, while at this moment we cannot immediately
envisage a situation in which the U.S. current account deficit cannot be promptly financed, it is true that its size
is raising concerns about its sustainability.
Overcoming those concerns will require a shift from a unipolar structure dependent on U.S. consumption to
a multi-polar structure including East Asia and Europe. This and the sustainable and self-reliant growth of East
Asia will be analyzed from Chapter II and onwards.
-74-