Japan’s Mr Yen on lessons from the Asian financial crisis

The 1997 Asian financial crisis wreaked havoc on the region’s economies, but Japan’s Eisuke Sakakibara, who was at front and centre of the action at the time, says most of the damage could have been avoided.

The International Monetary Fund backed by the US Treasury were the chief “culprits” in exacerbating the crisis, which started in Thailand and then spread to Indonesia, South Korea and other countries, he said, recalling the crisis in an interview in Tokyo.

Best known as “Mr Yen” for the role he played in yen-dollar diplomacy, Sakakibara was Japan’s vice finance minister for international affairs in 1997. He clashed with the IMF and then US Treasury Secretary Lawrence Summers over the handling of the crisis.

In 1997, he promoted the revolutionary idea of an Asian Monetary Fund to counter what he called the IMF’s Anglo-Saxon approach. The idea never got off the ground, but an equivalent institution did some years later.

Now 76 years old and a semi-retired professor of economics at Tokyo’s Aoyama Gakuin University, Sakakibara remains scathing in his criticism of the IMF’s behaviour during the crisis, which he says fanned what was a local fire in Thailand and turned it into a regional inferno.

He offered a Japanese perspective on what happened in 1997, how Tokyo struggled hard (but in vain) to extinguish the crisis, and what has been done since, which he says was largely at Japan’s initiative, to avert and fight future financial crises.

The 1997 crisis “started in Thailand which was attacked by hedge funds,” controlled by billionaire investor George Soros and others, said Sakakibara. “Thailand had balance of payments problems and was running a continuing deficit, so hedge funds attacked the Thai baht.”

Former Malaysian prime minister Mahathir Mohamad savaged Soros for his perceived role in precipitating the Asian crisis, but Sakakibara directs most of his scorn at officials in the IMF’s Asian Department at the time for behaving, he says, more like arsonists than fire fighters.

“I argued bitterly against the IMF,” he recalls, and particularly against the [then] deputy director of the Asian department Bijan Aghevli.

“He came to Asia and proposed very wrong solutions to the crisis,” said Sakakibara about Aghevli.

“He recommended closing a large number of financial institutions [in Thailand and elsewhere] in the middle of the crisis, and that accelerated it. He also recommended moving to flexible exchange rates, again in the middle of a crisis. If you do that, exchange rates collapse, which they did.”

Different view

The IMF saw things in a different light.

The “first signs of overheating had become increasingly evident in Thailand and other countries in the form of large external deficits and property and stock market bubbles,” former IMF first deputy managing director Stanley Fischer has said.

Pegged exchange rate regimes encouraged heavy external borrowing, which led to excessive exposure to foreign exchange risk by domestic financial institutions and corporations, said Fischer.

Sakakibara insists that whatever the problems that existed in Asia when the 1997 crisis erupted, the “cure” applied by the IMF was worse than the disease.

However, Sakakibara insists that whatever the problems that existed in Asia when the 1997 crisis erupted, the “cure” applied by the IMF was worse than the disease and ignored other solutions.

“I sent a mission to Indonesia of my staff [from Japan’s Ministry of Finance],” he recalls.

“We had our own prescriptions which were quite different from those of the IMF.

“They called the Asian economy [a case of] Crony Capitalism. They wanted to restructure Asian economies” along the lines of a more Anglo-Saxon model. That was the wrong prescription and especially to try to apply it in the middle of a crisis.”

Japan, instead, favored immediate, pragmatic measures, says Sakakibara.

“We recommended currency intervention to defend the [Indonesian] rupiah. We committed some of the foreign reserves of Japan [for this purpose] and we intervened [in the foreign exchange market on behalf of Indonesia and some other countries].”

However, this didn’t work well because of the political crisis in Indonesia at that time, which led to the collapse of the regime of President Suharto, he said.

IMF rival

Because of dissatisfaction with the IMF, Sakakibara proposed an Asian Monetary Fund to take care of Asia by those who know Asia, he said.

“Larry Summers was really opposed to that idea and he was successful in stopping it. We had been close friends, but I still recall his angry telephone call to me. He started with the remark, ‘Eisuke I thought you were my friend,’” said Sakakibara with a chuckle. “He was very angry.”

Even so, the two men’s friendship endures to this day says Sakakibara, who added that he and Summers eventually came to agree that the crisis was badly handled.

Sakakibara said his frustration at the time led him to suggest at an IMF and World Bank annual meeting in Hong Kong in 1997 to call for an Asia Monetary Fund.

This was beaten back by US opposition and because (as Sakakibara later acknowledged) he did not seek the support of countries such as China in advance. Tokyo had to settle instead for a more modest “Manila Agreement” that provided limited crisis cooperation among some Asian countries.

This evolved by 2010 into something more ambitious in the shape of the so-called Chiang Mai Initiative (CMI) — a multilateral currency swap arrangement among the ten members of the Association of Southeast Asian Nations, China (including Hong Kong), Japan, and South Korea.

The CMI was later brought under centralised control and became known as the Chiang Mai Initiative Multilateralised or CMIM with some US$240 billion of funds at its disposal to counter crises (although to this day it still has not dispensed any money).

Sakakibara’s dream of an Asian Monetary Fund took a step nearer to reality several years later when the ASEAN +3 Macroeconomic Research Office (AMRO ) was established in Singapore as the regional macroeconomic surveillance unit of the CMIM.

Getting there

“AMRO is actually the AMF revisited,” said Sakakibara. “It plays the role of an IMF in Asia.”

AMRO “existence may itself be a deterring factor for a crisis,” said Sakakibara, arguing the fact there has been no Asian crisis in the past 20 years as evidence.

Even so, what are the chances of another crisis occurring, given the record levels of debt (relative to GDP) in Asia and elsewhere, especially in the non-financial corporate sector in places like China, Malaysia, South Korea and India?

“I am not worried about another crisis,” said Sakakibara.

“If you look at the other side, the ratio of total assets to GDP is very high as well. Compared to the crisis 20 years ago, Asian countries now have a huge amount of foreign reserves.”

Debt levels all over the world have increased, not just in Asia, and we are now in a period of low interest rates. According to some economic historians, the interest level is as low now as in the 16th century. It is the end of modern capitalism, he said.

“We have conquered the major frontiers of the economy and we are now in a period of low profit rates and low interest rates. You may have some kind of mini-crisis but I don’t see any sort of major crisis coming.”