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New lending mechanism necessary for Asia: ADBI chief.

TOKYO, Sept. 20 Kyodo

Asia should move to create a new regional monetary pool to prevent another round of financial mayhem, according to the dean of the Asian Development Bank Institute (ADBI).

Masaru Yoshitomi told Kyodo News in an interview that the new facility, much like the aborted Asian monetary fund (AMF), would extend a helping hand to a nation mired in a liquidity shortage and the free fall of its currency.

"It's necessary to study the possibility of setting up an AMF-style mechanism," he said, noting a dose of massive financial assistance by the fund would prevent a full-blown financial crisis.

The Japanese-led proposal to establish the AMF, forwarded in the fall of 1997, was shot down by the U.S. government, which said it would run at cross-purposes with the International Monetary Fund (IMF).

A former senior career bureaucrat at the Economic Planning Agency, Yoshitomi argued that the Asian meltdown that began in the summer of 1997 was what he calls a "capital-account crisis," as opposed to a current-account crisis.

He said the IMF was largely responsible for further aggravating and prolonging the Asian crisis by responding with prescriptions for a current-account crisis, such as tight monetary policy, fiscal consolidation and structural reform.

Yoshitomi said a capital-account crisis is a liquidity crisis on the international front, characterized by sudden and massive outflows of private capital that had earlier rushed into the country.

To counter this type of crisis, he said, large and virtually unconditional emergency financing is essential at an early stage.

He referred to the international response to the currency crisis in Mexico in late 1994. The 50 billion dollar rescue package devised in early 1995 was a good example of swift and large assistance with almost no conditions attached, he said.

"It's better to create an AMF-style scheme that would assume the role of providing liquidity," he said. "Generous provisions would help to stem crises that are characterized by an international liquidity shortage and a currency free fall."

Yoshitomi, who became the dean of the Tokyo-based ADBI in January, urged the IMF to further analyze the nature and mechanism of the capital-account crisis and prescribe medicine for it.

Turning to the yen's recent rise against the U.S. dollar, he said the trend is a result of too high expectations of an early recovery in the Japanese economy, adding that it is "very undesirable."

"Even if there are signs that Japan's economy will pick up, it will be one year or more from now before a boom comes. The recovery is still under the surface," he said.

Given the discrepancy in economic performances between Japan and the United States, he said, the yen should be cheap, reflecting the real strength of the Japanese economy.

While admitting he cannot identify the exact cause of the yen's recent appreciation, Yoshitomi pointed to the possibility of speculators such as hedge funds setting the trend.

"If hedge funds are found to be involved in the recent currency market gyrations, it will be inevitable to mull tightening control on hedge funds so as to maintain the stability of exchange rates," he contended.

He said Japanese authorities have no effective short-term policy steps to halt or reverse the yen's upward spiral. Additional fiscal spending would lift long-term interest rates and the yen's value, while the effects of quantitative monetary easing are impossible to gauge, he said.

On the apparently overheating U.S. economy, Yoshitomi said, "As for U.S. stock prices, it will be impossible for them to make a soft-landing. But I'm sure a soft-landing will be possible for the U.S. economy."

Unlike Japan, U.S. authorities have enough room to take fresh fiscal and monetary measures to more than offset a possible downturn in the economy, he said.
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Publication:Asian Economic News
Date:Sep 27, 1999
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