Written by Tetsushi Kajimoto and Lika Kihara
TOKYO (Reuters) – Asian Development Bank President Masatsugo Asakawa said on Friday that capital controls and currency intervention are among the tools emerging Asian policymakers can use if rapid increases in U.S. interest rates and a stronger dollar lead to a debt crisis.
Asakawa, who was previously Japan’s top currency diplomat, said that with investment flows already volatile, Asian policymakers may also need to speed up the debate about strengthening the region’s financial safety net.
He said that while Asia is far from suffering from a crisis, many emerging countries are being forced to raise interest rates to stem capital outflows at the cost of their economies slowing.
Unless they raise interest rates, Asakawa said, emerging Asian economies will see their currencies devalue and their huge dollar debt inflated.
Asakawa, former Japanese deputy finance minister for international affairs, told Reuters this time that the pace of monetary policy normalization by the US Federal Reserve is too fast and is already causing some turmoil in emerging capital markets.
“With the US raising interest rates, emerging economies have no choice but to raise interest rates to avoid depreciating their currencies too much,” he said.
Some of the discomfort with the dollar’s rally, or at least the pace of its gains, is already evident in Asia.
Japan was buying the yen on Thursday for the first time since 1998 to halt its decline. India, Thailand and Singapore are plunging into dollar reserves to prop up their currencies, while South Korea said on Friday it would work with a large pension fund to limit its dollar purchases in the spot market and prop up the won.
Various forms of interventions were also seen in a number of regional stock and bond markets to mitigate volatility.
Asakawa is seen by some market players as the dark horse candidate in the race to succeed Bank of Japan Governor Haruhiko Kuroda, who will serve his term next year.
He declined to comment when asked about the prospects of becoming a candidate.
Risks to the economic outlook for Asia, such as slowing Chinese growth and the fallout from rapid US interest rate increases, as well as post-COVID 19 challenges such as food security, will be major topics of discussion at the Asian Development Bank’s September 26-30 annual meeting. He said.
Asakawa said many emerging Asian economies have enough reserves, such as large current account surpluses and foreign reserves, to weather another crisis. He added that as a last resort, they could take advantage of non-monetary policy tools such as capital controls.
“Some emerging Asian countries may intervene to prevent the devaluation of their currencies. Countries like Malaysia put capital controls in place during the Asian financial crisis,” Asakawa said.
“We are not there yet. But such tools may be among the options” in the event of a debt crisis, he said, declining to comment on Japan’s rare intervention this week.
He added that Asian policy makers should be prepared when volatile market movements destabilize regional economies.
“Portfolio investment flows are becoming fast and volatile, so policy makers should closely monitor moves. They should also be prepared for worst-case scenarios, such as accelerating the debate on strengthening regional financial cooperation,” Asakawa said.
In the long run, Asakawa said, emerging Asian countries can make their economies less vulnerable to market volatility by increasing tax revenue and reducing their dependence on external borrowing.
“It is better to finance social welfare costs through internal financing, rather than external borrowing,” he said, adding that introducing or intensifying a carbon tax might be among the options.
Japan, South Korea, China and ASEAN, a group known as ASEAN+3, are intensifying their efforts to promote the Chiang Mai Multilateral Initiative (CMIM).
CMIM plays a critical role in supporting regional financial stability by allowing member economies, which include ASEAN+3 and Hong Kong, to take advantage of currency swap lines to secure currencies in need.