Speech by
Sadakazu Tanigaki
Minister of Finance of Japan

At the Governors' Seminar: A Road Map for Asia's Economic Cooperation and Integration

3 May 2005
Istanbul, Turkey

Introduction

Ladies and gentlemen:

It is a great pleasure for me to speak at this Governors' Seminar "A Road Map for Asia's Economic Cooperation and Integration."

First, I would like to talk about the merits of regional integration, and the steps and strategies for successful integration. Then, I will outline regional cooperation in East Asia, which is being promoted jointly by the Association of Southeast Asian Nations (ASEAN), China, Japan, and Korea, the so-called ASEAN+3 framework. Finally, I would like to touch on my expectations for the ADB in promoting regional cooperation.

Merits of Integration

Ladies and gentlemen:

Asia is a region of great diversity. It is also a region blessed with diligent and capable human resources as well as with a vast pool of savings. It is essential to maximize these advantages in strengthening regional cooperation. To date, policy efforts on regional cooperation have been active in East Asia. I see a similar momentum for regional cooperation starting in South Asia, and recognize the potential for regional cooperation in Central Asia and Afghanistan.

Japan has been actively promoting monetary and financial cooperation in East Asia under the framework of ASEAN+3 Finance Ministers' Meeting and hopes that such regional cooperation will expand all over Asia in the future. Regional cooperation and integration should contribute to the growth of the global economy and should not be exclusive of other regions.

Regarding economic integration in Asia, I would like to draw your attention to three key merits for its economic growth.

The first is the economy of scale driven by the expansion of the market. Since the Asian region contains more than half the world's population, it could make up a truly mega-market beyond national boundaries. Notably, the ratio of intra-regional trade in East Asia has dramatically increased in recent years. This is a sign that the potential of a regional integrated market has turned into reality.

The second is complementarity. In Asia, comparative advantages vary from country to country. Some are industrial, while others are agricultural. Some excel in sophisticated manufactured goods, others in versatile products. Some have knowledge-intensive industries, others a labor force that is inexpensive and plentiful. Thus, regional integration in Asia can generate an even greater synergy effect than by simply adding up the strength of each country.

The third is the stabilization of the regional economy. Based on the lessons from the Asian currency crisis, there are a number of policy initiatives to build a regional framework for monetary crisis prevention. There have also been initiatives to strengthen linkages of policy-making in the region in order to create a regional economic structure that is resilient to global economic changes.

Steps and Strategies for Integration

Ladies and gentlemen:

How then should we promote regional integration in Asia? While referring to the case of EU integration, I want to emphasize that, a step towards economic integration has already been taken in Asia.

Progress must be made on all fronts-money, goods, and labor. In the case of the EU, the process began with the coordination of production. With regard to the monetary aspect, various efforts, such as the introduction of the ECU as a common calculation unit, were made for the stability of each currency in the region.

In Asia, on the other hand, monetary and financial cooperation under the ASEAN+3 framework, such as the Chiang Mai Initiative and the Asian Bond Markets Initiative, have taken precedence as a policy response to the Asian financial crisis. Japan has been actively involved in these initiatives. However, recently, initial progress has been witnessed on the policy front such as free trade agreements and economic partnership agreements (EPAs), thus expanding intra-regional trade in Asia considerably.

As for labor mobility, liberalization measures have been progressively implemented in the EU. In Asia, EPAs include provisions for labor mobility.

As the level of economic integration advances, policy coordination on macroeconomic and structural issues will become increasingly important. In the EU, policy coordination has played a significant role in the operation of the European Monetary System. Also under the ASEAN+3 framework, regional surveillance has been strengthened and active policy dialogue is being conducted.

Monetary and Financial Initiatives by ASEAN+3

Ladies and gentlemen:

Now, I would like to outline the monetary and financial cooperation under the ASEAN+3 framework to which Japan and other member countries have been actively contributing.

The first area of our regional cooperation is to build a regional framework to prevent and resolve currency and financial crises in Asia. Since 2000, the ASEAN+3 countries have been actively promoting the Chiang Mai Initiative (CMI), focusing primarily on building a network of bilateral swap arrangements. The network has expanded to a total of US$39.5 billion worth. At the ASEAN+3 Finance Ministers' Meeting tomorrow, several measures to enhance the CMI will be discussed.

The second area is the strengthening of regional economic surveillance. Adequate monitoring of regional economic situations is essential for crisis prevention through the early detection of irregularities and swift remedial policy actions. This monitoring is also indispensable in providing immediate assistance in the event of a crisis. Since 2002, through the ASEAN+3 Finance Ministers' process, we have been regularly conducting policy dialogue on country-level economic situations and policy issues three times a year.

The third area is the development of bond markets in Asia. One of the fundamental causes of the Asian currency crisis was the pattern of capital flow, which allowed for outflows of domestic savings and inflows of short-term capital. To constantly channel the domestic savings for investments in the region and to eliminate mismatches of currency and maturity in regional financing, the development of bond markets in the region is an extremely important task.

For this purpose, Japan has been vigorously promoting the Asian Bond Markets Initiative (ABMI). Concrete outcomes have already been achieved in this Initiative. One example is the issuance of collateralized bond obligation, or the so-called Pan-Asian Bond, in collaboration with the Korean Ministry of Finance and Economy. Another example is the flotation of local currency-denominated bonds issued by Japanese companies abroad, with a credit guarantee by the Japan Bank for International Cooperation.

At the ASEAN+3 Finance Ministers' Meeting tomorrow, it is expected that a new mechanism to continue the ABMI's momentum will be discussed.

Expectations for the Asian Development Bank

Ladies and gentleman:

To promote economic cooperation and integration in Asia is a unique mandate for the ADB as a regional development bank. In this context, there are five points, in particular, that I expect from the ADB.

The first point is support for cross border infrastructure development. To capitalize on the scale benefit of regional integration, it is essential to improve key infrastructure such as cross-border transport, telecommunications and power transmission. It is also important to unify the rules for power interchange to ensure its effective use. The ADB is making significant contribution in this regard, as is the case with the Greater Mekong Subregion Program, and I hope that the similar assistance will be strengthened in South Asia and Central Asia.

The second point is assistance for strengthening regional financial markets. In order to channel regional savings for regional infrastructure, the ADB's regional departments can facilitate financial sector reform. The Private Sector Operations Department provides supports to catalyze private capital flows and to strengthen private financial institutions. The Treasury Department is expected to contribute to the development of regional bond markets by issuing local currency bonds. It is essential for the ADB to establish systematic linkage between the roles of these departments, so that the ADB can increase its effectiveness as a whole.

The third point is promotion of intra-regional cooperation on trade. The ADB has played a key role in promoting dialogue among countries of the Greater Mekong Subregion (GMS) and Central Asia to facilitate intra-regional trade, for example, by harmonizing customs procedures. It is also important for the ADB to supplement private financial institutions by trade finance facilitation.

The fourth point is the facilitation of immigrants' remittance to their home country. Globalization enhances labor mobility, thus increasing the number of immigrants. In this respect, the ADB is expected to expedite its study on remittance.

The final point is the encouragement of policy dialogues on regional economy to help exchanges of views on economic policies of each country. While the ADB already plays a significant role in regional surveillance, I hope the newly expanded Office of Regional Economic Integration will intensify and strengthen its role in this field.

Concluding Remarks

Ladies and gentlemen:

I hope my observations and the following comments of the honorable speakers will be helpful in exploring the possibility of future regional integration in Asia. I would like to close by underlining that Japan is committed to promoting economic cooperation and integration for the further prosperity of the region.

Thank you.