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I wish to thank Professor Hugh Patrick for detailed comments on the earlier version of this paper. I also thank Suparna Chakraborty and seminar participants at the IMF Institute and the Japan Economic Seminar for helpful comments. The views expressed herein are those of the author.
For example, Williamson (1999) proposes a common basket peg among East Asian economies. Ogawa and Ito (2002) also advocate a basket peg to keep the real effective exchange rate stable. Kwan (1998) makes a proposal for a formation of a yen bloc in East Asia.
For example, finance ministers from China, Japan, and Korea have announced tentative measures to coordinate their currencies in manners that can ultimately lead to a formation of a common regional currency. See “Asian Finance Ministers Seek Common Currency,” New York Times, May 5, 2006, http://www.nytimes.com.
See, for example, a webpage entirely dedicated for the internationalization of yen on the Ministry of Finance website: http://www.mof.go.jp/yen-itiran.htm.
Indeed, McKinnon (2000) reports that East Asian countries restored the East Asian “dollar standard” after the 1997/98 crisis. More recently, Chow, Kim, and Sun (2007) find that the role of the U.S. dollar declined in East Asia after the crisis while that of the yen and other currencies remains mostly the same.
Note, however, that the Japanese economy began to recover in 2002. See International Monetary Fund (2007).
Broda and Weinstein (2007), however, show that Japan’s growth is likely to be underestimated due to the overstatement in its CPI. For example, the average growth rate of Japanese real household consumption per capita over the 1999-2006 period was 1.2 percent after correcting for the biases in the Japanese CPI while the official data suggest that the growth rate of consumption was only 0.4 percent during the same time period. Thus the growth figure in Table 1 may also understate Japan’s actual growth rate, but the overall conclusion of this subsection does not change.
A similar trend seems to hold for FDI flows. Callen and McKibbin (2003) report that, while Japanese FDI flows to East Asia increased, the relative importance of Japanese investment in East Asian countries declined during the 1996-2001 period. See also Nakagawa and Faulkner-MacDonagh (2007) for recent developments for Japan’s capital flows, including FDI.
See also Anderson and van Wincoop (2001) for more discussions on the theoretical implications of the model.
This is a standard assumption in the literature. See, for example, Anderson and van Wincoop (2003) and Noguer and Siscart (2004), among others.
I would like to thank Mr. Matthias Reister of the United Nations Statistics Division for clarifying the data source of Comtrade database after 1999.
Recent studies that estimate the impact of euro on trade report much smaller currency union effects but the size of estimated euro effects vary across studies. For example, Bun and Klaassen (2007) report the estimate of euro effects to be 0.032 while Flam ad Nordstrom (2007) report the estimated coefficient to be 0.248. Note that these studies include only industrialized countries or EU members in the sample.
For example, Flam and Nordstrom (2007) estimate the effects of single market policy on trade and FDI. They find a large impact of single market policy on FDI but no impact on trade.
On the other hand, the depreciation of yen would erode the external competitiveness of East Asian economies. For example, Ramaswamy and Samiei (2003) argue that the loss of competitiveness due to the dollar peg coupled with the sustained depreciation of yen against dollar was one of the triggers for the Asian Crisis in 1997.
See Ito (2004) for an overview of these movements toward regional economic integration in East Asia. See also the Ministry of Finance’s website on regional financial cooperation at www.mof.go.jp/english/if/regional_financial_cooperation.htm.
The study group was created at the Informal ASEAN+3 Finance and Central Bank Deputies’ Meeting in November 2002. The study group has conducted various studies on financial cooperation. For instance, one of the most recent studies examines steps to create regional monetary units in East Asia. See the ASEAN’s website at http://www.aseansec.org/17880.htm for all the reports prepared by the study group.
As for the use of yen in other areas, Lopez and Spiegel (2006), for example, show that foreign financial market participation in the international yen-denominated bond underwriting activity increased over the last decade partly due to the interest rate differential between Japan and the United States and also the financial difficulties faced by domestic competitors in Japan.
For example, Hummels (2001).
This result is consistent with a view that ASEAN has been the driving force of the regional trade process in East Asia. Some observers therefore argue that ASEAN, rather than China or Japan, should be the main player for the regional integration in East Asia. See Bergsten (2007) who discusses the political economy of the regional integration in East Asia.
On the other hand, Ogawa and Kawasaki (2007), examining common currency basket arrangements in East Asia, report that a common exchange rate policy with reference to a common currency basket among ASEAN plus Japan became feasible in the post crisis period. However, their focus is mainly on the Japanese yen, not necessarily the comparison between yen and yuan.
Such a prospect is becoming increasingly uncertain in light of the ongoing global financial crisis, however.