Coming of Age: The Emergence of the Yen Bloc

By Jaffee, Valerie | Harvard International Review, Spring 1996 | Go to article overview

Coming of Age: The Emergence of the Yen Bloc


Jaffee, Valerie, Harvard International Review


DRAMATIC MONETARY FLUCTUAtions have, in recent years, markedly reduced international confidence in the dollar, especially in the Asia-Pacific region where the dollar has served for years as a foundation for local currencies and international trade. Questioning the region's reliance on the dollar, economists and Asian leaders are beginning to see the Japanese yen as a viable potential successor to the dollar as the dollar as the region's chief currency. In 1994, the US dollar dipped below the symbolically significant level of 100 Japanese yen. Since January 1995, the yen has risen against the dollar by 20 percent. These signals indicate the rising influence of the Japanese yen in international markets.

The vague but evocative phrase "yen bloc" is appearing with greater frequency in analysts' predictions about Asia's monetary future. In the past, this term has been used to describe a wide variety of phenomena, but the most recent and prominent discussions usually refer to a revamped Asian currency system with the yen as the focal point. One of the major characteristics of such a yen bloc would be huge increases in the use of the yen in Asian international trade and currency markets. Only 15 percent of Japanese imports and 40 percent of Japanese exports are presently denominated in yen, according to Japan's Finance Minister Masayoshi Takemura; these percentages are significantly smaller than corresponding percentages for the United States, Germany, and other economies of comparable size. However, intra-Asian trade is increasing rapidly, thereby eroding the relative prominence of the United States as a trading partner. As Japan's role as a market for goods from the rest of Asia expands, exporters in those countries should begin to deal and to analyze options in terms of yen. A similar effect should follow in other Asian nations as they import more from Japan.

Another major component of a monetary yen bloc is a significant increase in the proportion of Asian central banks' foreign-exchange reserves that are denominated in yen. Currently, this fraction is incongruously lower than the nations' ratio of Japanese trade to their total trade. For example, South Korea held less than 15 percent of its foreign-exchange reserves in yen in 1989. In contrast, between 20 and 25 percent of South Korea's international trade that year was conducted with Japan. Increased reserves of yen can lessen the exchange-rate risks associated with these transactions. Furthermore, most nations in the region have received yen-denominated loans from Japan. The higher price of the yen means that repayment of those loans will place a heavy burden on those nations unless they acquire yen for themselves immediately in order to alleviate the rapid upward spiral of those debt burdens.

Economists have also claimed that these two major components of the yen bloc will be accompanied by the decision of Asian governments to peg their national currencies to the yen. Despite the yen's appreciation against the dollar and other major currencies, trade is increasing between Japan and its neighbors. Currencies stabilized against the yen would significantly reduce the risks presently faced by Asian nations in their economic transactions with Japan.

While these three traits are generally accepted as the most fundamental foundations of a monetary yen bloc, the specific characteristics of such a structure are more difficult to predict. For example, there is the question of which nations would participate. South Korea, Taiwan, and the Association of Southeast Asian Nations (ASEAN)--Singapore, Indonesia, the Philippines, Malaysia, Thailand, Vietnam, and Brunei--are the most likely to be involved, but speculations about the potential role of Australia, New Zealand and the People's Republic of China abound. Another point of contention among experts is the pace at which a yen bloc might develop. The Nomura Research Institute in Japan reported that a de facto yen bloc might emerge by 2025; a Deutsche Bank economist, however, claimed that such a structure could take shape as early as 2005.

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