Foreign reserve accumulation in Asia: Can it be sustained?

Asian governments have been accumulating foreign reserves (largely United States securities) on a large scale, as a result of maintaining fixed exchange rates or attempting to limit currency appreciation in the face of a weakening US dollar. The effects on Asia to date appear relatively benign. More expansionary monetary conditions have helped some economies that were experiencing actual or near-deflation not long ago. Monetary authorities have been reasonably successful in maintaining monetary control through sterilisation operations without pushing up interest rates. This situation is unlikely to be sustainable in the long term, as sterilisation on the recent scale cannot be maintained indefinitely. Ultimately, policy-makers cannot fix the real exchange rate. If economic fundamentals require a real appreciation, this will eventually occur through either nominal appreciation or higher inflation.