Interview with Takatoshi Kato Top IMF official underscores need for flexible exchange rate management in Asia

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IMF SURVEY: How do you view the tremendous build up of foreign exchange reserves in Asia in recent years? How do you react to charges that all this -one-way intervention- amounts to currency manipulation and to concerns about a lack of exchange rate flexibility in Asia?

KATO: One of the lessons of the 1997-98 Asian financial crisis is that it makes sense for an emerging market economy to build up its foreign exchange reserve position to enable it to better handle short-term liquidity problems. So I can understand the desire of these countries to accumulate foreign exchange reserves.However, they now have the equivalent of about nine months’ worth of imports-which is eight timesPage 264 larger than their short- term debt-so they can feel quite comfortable with current reserve levels. A challenge for the IMF is to persuade some Asian member countries that it is in their own best interest to manage their exchange rates with greater flexibility. Supporting measures need to include developing an active foreign exchange market with instruments to allow participants to cover foreign exchange risks and a more general modernization of economic structures to increase resiliency against shocks.

IMF SURVEY: What about charges that some of these countries are manipulating their exchange rate to help their exports?

KATO: Manipulation is an emotional term that has been used too widely and too loosely. Some countries accused of manipulation have had longstanding exchange rate pegs; others so accused have seen large swings in their currencies over the period since the onset of the Asian financial crisis. Is it manipulation to "lean against the wind" of swings in currency markets? Or to maintain an exchange rate? Clearly not, as a matter of definition. A much more nuanced assessment is needed to evaluate whether a country's exchange rate management is appropriate-which is exactly what the IMF seeks to provide in its annual Article IV consultation with a country's authorities.

IMF SURVEY: Some have argued that the failure of IMF quotas to reflect the current economic importance of the Asian emerging market economies will add to the incentive for the region to create an Asian Monetary Fund independent of the IMF. How do you see those arguments? Do you favor stronger Asian monetary cooperation, and what would this mean potentially for the IMF?

KATO: Most countries in Asia recognize the benefits that can accrue from closer regional cooperation and...