Japan's Monetary and Financial Cooperation in East Asia \ From the Viewpoint of the Spillover Effects of Currency Misalignment

The purpose of this paper is to examine what forms of monetary and financial cooperation will be desirable in East Asia with a focus on the spillover effects of currency misalignment on the Japanese economy in particular, thereby obtaining implications for monetary and financial cooperation in which Japan should engage in the region in the future. First, we took an overview of the movements of East Asian countries f currencies using the Asian Monetary Unit (AMU) and the AMU Deviation Indicator, which have been attracting attention in recent years as tools to measure currency misalignment. Then, we conducted empirical analysis of exchange rate systems adopted in effect by East Asian countries by measuring the currency basket weight and discussed the relationship between the systems and the global financial crisis. By conducting analysis with regard to both the pre-Lehman Shock period and the post- Lehman Shock period, we showed that because of the global financial crisis, the currency peg to the US dollar strengthened in some countries and weakened in others. Next, we conducted a structural VAR (vector autoregressive) analysis as to how currency misalignment among East Asian countries could affect Japanese macroeconomic variables using the real AMU Deviation Indicator and examined what kind of exchange rate system and exchange rate policy will be desirable in order to achieve macroeconomic stability.