Despite the dollar's recent decline, there are currently no alternatives to the greenback as a key global currency, according to Toyoo Gyoten, president of the Institute for International Monetary Affairs, a public-interest foundation.
Gyoten, 80, told The Asahi Shimbun that the dollar-based system is unlikely to end soon, but reform of the International Monetary Fund is needed to bring stability in the currency markets.
After joining the Finance Ministry in 1955, Gyoten served as the director of the ministry's international monetary division and vice minister of finance for international affairs. In 1985, he played a major role in the 1985 Plaza Accord, an agreement among five developed nations, including Japan and the United States, to depreciate the value of the U.S. dollar against the yen and the German mark.
Excerpts from the interview follow:
Q: The U.S. dollar "brand" as the key currency is believed to have flagged. What do you think about this?
Gyoten: The dollar-based international trading system has rested upon traders' trust in the United States as a superpower. However, with the country's massive fiscal debts, Standard & Poor's Financial Services downgraded its rating of U.S. bonds (to AA-plus from AAA in early August), denting investor confidence in the dollar.
If the dollar continues to lose investor trust, the global market could fail. Much of the recovery in the currency's creditworthiness depends upon whether the U.S. economy can be revived.
Q: Do you think any other currency could take the place of the dollar?
Gyoten: The euro was briefly expected to grow into the key currency, but the European economy has deteriorated as sovereign debt crises among European countries escalated. Japan also once intended for the yen to become comparable to the dollar, but the two-decade stagnation following the collapse of the bubble economy (from the late 1980s to the early 1990s) inhibited growth of the yen as an international currency.
Given those facts, there are no alternatives to the dollar as the United States remains an overwhelming power. Therefore, it is highly unlikely that the current dollar-based system will come to an end any time soon.
Q: Markets have recently seen substantial yen buying. Do you think there have been any changes in the position of the yen as an international currency?
Gyoten: Fears over a further deterioration of the U.S. and European economies and government fiscal woes facing those nations have driven the yen higher, as Japan has a relatively stable financial system. However, this trend is only a temporary move and does not mean the yen has gained in presence as a global currency.
Q: To curb the yen's appreciation, Japan intervened in the exchange market (in early August). What do you think of this move?
Gyoten: If Japan asks Washington to cooperate in a coordinated exchange market intervention, the U.S. government will not follow the request. That is because, given its low levels of domestic consumption, Washington wants to take advantage of the current weak dollar market to improve competitiveness in exports. However, if the dollar depreciates further to the point where the creditworthiness of the dollar is in jeopardy, the United States will need to work together with Japan to prevent the issuance of its national bonds from being an ineffective option (to finance the government).
Q: What action do you think needs to be taken to stabilize the exchange market?
Gyoten: Reforms should be implemented in the International Monetary Fund. Although the organization was originally designed to stabilize international monetary systems, it has had its hands full with the task of providing financial support to cash-strapped European nations. The IMF needs to play its intended role of coordinating views of its member countries and leading concerted measures among them. The IMF is also expected to properly monitor the economic situations of the countries and the policies adopted by them.
Q: What else can be done?
Gyoten: I would suggest setting up a discussion panel by nations with major international currencies, which are the U.S. dollar, the euro, the yen, the pound, the renminbi and the Swiss franc. From a medium- to long-term perspective, we need to correct disparities in the global economy--which have caused the situation where one currency continues to soar against others--while governments must step up efforts to cut their deficits.
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