The rekindled appetite for an Asian Monetary Fund: A Japan perspective

A call for a new global economic order is emerging in response to the many risks facing growth worldwide. A reassessment of supply-chain priorities, a hedging of energy security risks, and a push-back against the weaponization of economic hegemony by authoritarian regimes, are but a few elements of the fundamental rethink of economic rules and values across the globe.  A reassessment of the power of the US dollar is also emerging; the influence of the greenback on the international financial system is increasingly under scrutiny, even among Washington’s staunchest allies and partners.

For countries across the Indo-Pacific, though, there are growing fundamental concerns about whether the existing economic architecture can continue to adequately address the needs of the region’s potential. While China may be providing much-needed financing for new projects, the burden of this debt is becoming increasingly clear. Meanwhile, even as the United States continues to define the rules of global financial markets and the dollar remains the international currency of choice, Washington’s commitment to ensure financial stability worldwide is increasingly unclear.

Earlier this year, Malaysian Prime Minister Anwar Ibrahim argued in favour of a mechanism focused on the stability of Asian economies in the form of an Asian Monetary Fund (AMF). Ibrahim stated in February 2023 that Asian nations “cannot have the international infrastructure being decided by outsiders” (Takahashi, 2023). He continued, “We can work with them, but we should have our own domestic, regional, and Asian strength, not necessarily to compete but to have a buffer zone.” Three months later, Malaysia’s former prime minister Mathathir Mohamad echoed Ibrahim’s concerns, pointing out the vulnerabilities of the US dollar in particular as the underlying currency of the global financial system.

“For a long time, we [have made] use of the US currency, but the US currency depreciated [over the years] and it is no longer that stable. So, because of that we […] proposed a trading currency for East Asia, just for trade, not for domestic use,” Mohamad said in an interview with the Nikkei in May (Goh, 2023).

Malaysia is not alone in voicing concerns about how the current economic architecture meets the needs of some of the most robust countries in the Indo-Pacific. Across South-East Asia, there is growing concern about tensions between Washington and Beijing, which are expected to persist for the longer term, and the desire among members of the Association of Southeast Asian Nations (ASEAN) not to be forced to choose one side over the other. At the same time, it is clear that South-East Asian nations, even as a bloc, cannot meet the ever-growing and evolving needs of the region in isolation.

Japan, meanwhile, is stepping up efforts to champion a third way not captured in the binary competition of democracy vs authoritarianism that Washington has focused on under both Democrats and Republicans. Instead, Tokyo is sharpening its focus on advancing a rules-based order, advocating for countries to adhere to established international law regardless of their political system. The question is whether Japan can establish new institutions based on prevailing international rules and norms, especially when it comes to advancing regional economic needs.

Japan is hardly new to such endeavours: It certainly came close to making the idea of an AMF a reality nearly three decades ago during the 1997 Asian financial crisis. Since then, Japan has become better positioned politically to move forward with the concept, and the case for establishing such a regional mechanism is stronger. The question though is whether Tokyo has the appetite to follow through with such a proposal and, more significantly, whether such an AMF could address the evolving needs of the Indo-Pacific moving forward.

Revisiting Japan’s AMF initiative three decades on 

In 1997, the world was taken by surprise as economies across Asia tumbled, sparked by Thailand’s decision to unpeg its currency from the US dollar, which led to the devaluation not only of the Thai baht but other currencies across the region, as well as a massive flight of capital from Asian countries including Indonesia, Malaysia, and South Korea. The baht’s value halved within six months, while the Indonesia rupiah tumbled by 80 percent, and the values of the Korean won and Malaysian ringgit dropped by nearly 50 percent (Carson and Clark, 2013). Contagion spread the financial crisis beyond Asia and into Russia and Brazil the following year.

At that time, the dollar’s position as the dominant global currency, and the resulting outsized influence of the Federal Reserve on international financial markets in particular, came under scrutiny. The impact of the Asian financial crisis went well beyond the region and indeed the parameters of economic policy. Until then, the rise of East Asian economies since the end of World War II had been seen as nothing short of miraculous. Indeed, the World Bank published a report reflecting that sentiment in 1993: The East Asian Miracle: Economic Growth and Public Policy highlighted the achievements of eight countries between 1965 and 1990 for their ability not only to bolster economic growth, but also to reduce income inequality and lift a large swath of the population out of poverty. At the same time, academics including Campos and Root (1996) have argued that it was good governance conducive to business investments, rather than economic authoritarian rule, that led to the surge of the economies of Japan, South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and Indonesia.

The Asian financial crisis, however, caused the seemingly unstoppable confidence of the so-called Asian tigers to crumble, as governments struggled to provide the necessary financial regulatory frameworks, and their economic prospects faltered without intervention from the established international financial institutions led by Western powers. Granted, Malaysia succeeded in enforcing short-term capital controls, which in turn allowed the country not to have to resort to loans and the conditional reforms required by the International Monetary Fund (IMF). Indeed, Malaysia was the only country severely impacted by the financial crisis that did not call for IMF lending, and yet recovered at least as quickly as any country that took such lending and had to implement IMF policies (Buckley and Fitzgerald, 2004). Perhaps it is not so surprising that the rallying cry for revisiting the idea of an AMF is being spearheaded by Malaysia’s past and current leaders.

At the height of the crisis, however, it was Japan at the forefront of clamouring for a regional financial institution, rather than Malaysia or any other Asian country. According to a recent interview with Eisuke Sakakibara, vice minister of finance for international affairs at the time of the crisis, Japan had proposed the idea of an AMF “because the IMF, which did not know much about Asia, botched its response to the crisis” (Takahashi, 2023).

For Japan in 1997, the potential establishment of an AMF had a dual purpose. It was above all a mechanism to provide much-needed support to stabilize the Asian economies quickly and effectively. At the same time, it was also a geopolitical manoeuvre, as Japan sought to bolster its own presence on the international stage, especially in Asia. Nevertheless, Tokyo’s efforts to launch the AMF withered on the vine as a result of the power dynamics in the region. To be sure, Japan’s economic position still stood ahead of China at that time, so Tokyo should have been able to overcome any opposition by Beijing had it been the only source of pushback. But the largest opposition actually came from the US and Europe, both alarmed by the prospect of a new entity that could undermine the role of the prevailing Bretton Woods institutions (IMF, 2023).

The Peterson Institute’s Fred Bergsten argued that the greatest weakness of the IMF and the World Bank in preventing the financial crisis was the lack of effective early warning and action systems, especially when the challenges facing Thailand and South Korea in particular were already anticipated by some analysts. Bergsten (1998) among others pointed out that early warning systems could be applied most effectively at the regional level, given that countries in the actual region would be better able to detect emerging problems than those further away. The Asian Development Bank, too, saw advantages to the establishment of an AMF, most notably to develop a more institutionalized multilateral structure as part of a regional financial safety net that would include foreign exchange reserves and bilateral swap arrangements (Hyun and Paradise, 2019).

At the same time, the driving force behind Tokyo’s push for an AMF in response to the financial crisis was not simply to establish an entity that would act as a regional alternative to the IMF, but also to decrease the dependence of Asian economies on the US more broadly. Certainly, the US Treasury’s concerns were not unwarranted, in particular about Tokyo challenging the established economic architecture, since the creation of a regional financial architecture would have diminished the role of the IMF, at least in Asia. Since the Asian economies have rebounded since the last financial crisis, the question now is whether the establishment of an AMF today would be able to pre-empt crises in the future on the one hand, and, on the other, better meet the needs of countries across the Indo-Pacific should one occur.

Japan’s lukewarm response to the idea of a redux campaign for an AMF

Nearly three decades after the idea of an AMF was first floated by Tokyo, the time now should be especially ripe to establish a mechanism solely devoted solely to meeting the emergency financial needs of Asian governments. The fact that the US Federal Reserve’s rate hikes over the past two years have led the greenback’s value to surge has led major regional economies including Malaysia and India to step up calls for the establishment of an AMF to fend off a potential economic crisis in the region. The dollar’s dominance itself has come into question, not least because of a stronger greenback burdening debt holders in emerging markets even further. Increased economic fragilities as a result of the global pandemic, coupled with rising energy as well as food prices worldwide, have undoubtedly been of concern. At the same time, there has been a broader backlash against having the dollar as the world’s chief reserve currency. Such trends have contributed to a movement towards less dependence on, if not independence from US-led financial institutions, which in turn has given greater impetus to the ideology behind an AMF.

The current geoeconomic landscape of the Indo-Pacific is significantly different from that of 1997. For one, while the US remains the world’s largest economy, it is facing greater competition as the international financial leader from China, rather than Japan. Moreover, unlike Tokyo, Beijing has hardly been restraining itself in light of opposition from Washington, or from any other country for that matter. One such example was the launch of the Asian Infrastructure Investment Bank (AIIB) in 2016. To date, the US and Japan remain two of the few countries that have declined to join the multilateral investment bank, ostensibly amid concerns about its lending practices. Since then, the institution has grown into the world’s second-largest multilateral development institution, and there had been considerable anticipation at the time of its establishment that the AIIB would play a key role in meeting the growing infrastructure investment gap worldwide. Nevertheless, the prospect of more financing for much-needed infrastructure projects did not, for Washington, outweigh its wariness of China leading an institution that could hamper the role of the US as the standard-bearer of international institutions and the world order more broadly (Wright, 2015). It could be argued that Washington’s knee-jerk reaction against the AIIB was not unlike Washington’s response to Japan’s proposal for an AMF, even though Tokyo quickly withdrew that proposal in light of the US response, unlike China’s reaction with respect to the AIIB.

Seven years since the establishment of the AIIB and a decade after China’s launch of its Belt and Road Initiative, it has become clear that China is looking to parlay its economic dominance into wider influence, by providing much-needed financing to developing countries through new mechanisms that would reflect its own rules and values in financial markets. For China, the discussion around an AMF provides another forum to shape an international financial institution that would be free of US involvement, and offers a chance to deepen its relations with the emerging markets of the Indo-Pacific. While Beijing’s appetite to compete head-on with the US may be waning, its vision to lead the Global South has not abated.

Japan, on the other hand, has shied away from launching new financial initiatives, but rather has taken on a new strategy to further its own national interest by focusing on investing in the advancement of a rules-based order within and beyond the Indo-Pacific.

As a result, there has been little appetite in Tokyo to follow the drumbeat in South-East and South Asia to revisit the idea of an AMF, despite the considerable risks facing the global economy. To be sure, Japan continues to uphold the goals of an AMF as put forward at the time of the Asian financial crisis, namely ensuring financial stability and the ability for countries to access assistance in a timely manner when the need arises. What has changed, though, is Tokyo’s vision of global economic leadership and its role in ensuring regional economic stability.

Evolution of Japan’s vision for regional economic leadership

While China remains keen to press ahead with its own economic vision, especially in the Global South, Washington is finding it increasingly challenging to make headway in emerging markets, especially in South-East Asia. Political headwinds against US-led institutions are growing stronger across the Indo-Pacific, even if ASEAN nations may not necessarily be drawn to Chinese economic leadership either. Japan’s vision, on the other hand, is to focus on preserving the rule of law, most notably through its push for a strategy it has termed “Free and Open Indo-Pacific.” It is steadily building up its role as a bridge-builder between the advanced economies including members of the G7 and the Global South as well as the divergent economies of South-East Asia, and also enhancing its relations with the US in particular as a trusted partner in the region.

Washington’s efforts to enhance existing financial institutions and further relations with allies and partners is especially welcomed by Tokyo in this context. As such, the Biden administration’s latest endeavours to reshape and scale up the World Bank together with the G20 are aligned with Japan’s own strategic objectives for the Indo-Pacific (United States, 2023). At the same time, Tokyo’s appetite for establishing a new economic framework to provide regional economic stability has waned over the past three decades, but rather it is pursuing a more cost-effective and collaborative means to ensure that the world’s most populous and dynamic region can withstand the economic shocks that it is likely to face moving forward.

Calls to revisit the concept of an AMF reflect not only anxiety about the risks facing the global economy, but also wariness of the US dollar wielding outsized influence over the economies of South-East Asia in particular. But while it was Japan that had initially put forward the idea of an AMF in response to the regional financial crisis nearly 30 years ago, Tokyo no longer sees such a mechanism as the way forward either to pre-empt or resolve a crisis in the future. Japan’s own vision of regional economic leadership has evolved over the decades, and while the risks to global growth and the possibility of a contagion effect remain, the establishment of an AMF is no longer seen as part of the solution. Instead, Tokyo’s focus will be to encourage greater commitment by the advanced economies for regional economic stability through existing mechanisms, including the Bretton Woods institutions, and to press for like-minded South-East Asian nations to coordinate efforts for economic resilience moving forward.