"It’s true (central banks in the region) have accumulated foreign exchange reserves beyond their need... This move stemmed from the nightmarish events that hit East Asia in the summer of 1997, and you need to understand that background" when discussing the cost of accumulating and holding large currency portfolios, Haruhiko Kuroda said.
The cost of holding assets denominated in other foreign currencies including the dollar tend to be high for developing countries, which often boast stronger economic growth and therefore higher interest rates, Kuroda said.
But those costs may be acceptable for Asian countries that have been "weighed down heavily by their experience in 1997," Kuroda, a former vice finance minister for international affairs at Japan’s Ministry of Finance, told Dow Jones Newswires in an interview. He was speaking after a meeting of the Inter-American Development Bank in Ginowan in Okinawa Prefecture, southern Japan.
Economists often point to Asia’s huge currency reserves as evidence of it being a catalyst for expanding global trade imbalances such as the US current account deficit.
"Asia’s trade surpluses have increased in tandem with deficits with the US, but at the same time surpluses gained by Europe, the Middle East, and other regions have also widened," he said.
"I find it hard to say that Asia is the main cause" of those economic imbalances, he said.
"Among various factors (that have contributed to the widening of the trade gap) a major one has been within the US" Kuroda said, pointing to the continued growth in the US budget deficit. "It is right that global imbalances must be coped with, but it’s not true that everything will be fixed as long as Asia slashes its trade surpluses."
Kuroda declined to comment on recent market speculation that the world’s central banks have been diversifying their currency holdings away from the dollar to maximize their profits by investing in a wider range of assets besides risk-free US government bonds. But he said, "It’s basically up to each country to determine its own (guidelines for) reserves management.
Kuroda also said that while it is up to the Chinese government to decide on the timing and method of changing its foreign exchange system, "I believe it would be in China’s interests to move quickly to a flexible system."
"It has become more difficult for China to determine its monetary policy if it keeps (the yuan pegged tightly to the dollar), and that’s not a good thing from the standpoint of macroeconomic control," he said.
Unlike countries with smaller economies that often gain from fixed exchange rate systems that help stabilize movements of goods and service prices, "China is such an enormous economy, and it’s not appropriate for such an economy to fix its own currency" by pegging it to another major currency like the dollar, he said.
Kuroda added that it may once have benefited China to use a currency peg when the rate of inflation was accelerating rapidly, but not anymore.
