By Yasuto Watanabe

It is said that major financial crises occur every ten years. It is likely that 2018, which many believed would follow the ominous precedents of the 1997/98 Asian Financial Crisis and the 2008 Global Financial Crisis, will end without crisis events, even we are observing the rout in the equity markets. In 2019, however, with further tightening of global liquidity and prolonged uncertainties in the world economy, there is no guarantee that we will enjoy another crisis-free year.

First, here’s a look back at what happened around the world in 2018.

The U.S.

2018 will be remembered by many as the year elements of ‘Trumpian economic policy’ were put in practice, particularly policy relating to the trade tensions with China, which has escalated. More importantly, under the Trump administration, the U.S. has retreated from its position as the guardian of the international trade system – in fact, starting in 2018, the U.S. has started behaving as just one of the players in the international economic system, and not its leader. This is far cry from the Bretton Woods’ financial and economic infrastructure, in which the U.S. was considered pre-eminent. As such, when the next international economic crisis happens, there is no longer a guarantee that the U.S. government will shoulder the responsibilities and take leadership in addressing it, unless the U.S. economy is at the epicenter of the crisis as it was in 2008.

In this context, all other countries would be better to rely on other measures than on the existing system. For example, regional economic integration is regarded as an alternative in the absence of advances in the international trade regime. In 2018, we observed the march of regional trade collaboration in our region. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11) will come into effect on 30 December 2018. Separately, the Economic Partnership Agreement between Japan and Europe is scheduled to come into effect on 1 February 2019, whole discussion on the Regional Comprehensive Economic Partnership (RCEP) is also expected to progress in 2019.


With the completion of the Brexit deal being carried over into 2019, there is growing skepticism around the sub-effects of economic integration in Europe, and the increasing appeal of nationalism in the region..

Although there are now increasing financial integration question-marks in the euro area now, particularly after the European debt crisis, financial integration there precedes what we see in Asia, by two or three decades and is there to stay. In fact, on 14 December, the Euro Summit endorsed the Eurogroup’s proposal on the deepening of the Economic and Monetary Union, which included “ESM 2.0”, a set of measures to strengthen the European Stability Mechanism – the region’s financing arrangement. Under the proposal, the ESM will continue carrying out reforms reforms that encompass extended surveillance,  crisis management, and a broader scope of financing in times of need.

East Asia

Economic integration in East Asia is still told as a story of a future far away.

The ratio of intra-regional trade and financial transactions in the ASEAN+3 region, which includes the 10 members of ASEAN and the economies of China (including Hong Kong, China), Japan and Korea, is increasing; and economic relations among the regional countries are deepening. The regional financing arrangement – the Chiang Mai Initiative Multilateralization (CMIM) – has also consistently been worked on and enhanced in terms of size and workability, since its inception in 2010. Now, together with its strengthened surveillance arm ASEAN+3 Macroeconomic Research Office (AMRO), its mechanism has is efficient and effective. However, institutional integration progress has been slower.

Persisting global uncertainties and the region’s simultaneous growing integration with the global economy, imply that the demand for CMIM’s insurance and defense function will grow further. At the ASEAN+3 Deputy Finance Ministers and Governors Meeting held in Busan in December 2018, the discussion on “the future direction of the CMIM” was kicked off.  At the same time, it may be worthwhile for the regional economies to consider introducing ESM-type functions and initiatives such as stabilization mechanisms in Asia.

Separately, Bilateral Swap Arrangements have been rapidly developed in ASEAN+3 region, now amounting to the equivalent of about USD320 billion, which exceeds the size of the CMIM (USD240 billion). ASEAN+ 3 members’ foreign currency reserves have increased since the Asian Financial Crisis to more than USD 6 trillion.  These foreign reserves act as the first line of defense against a financial crisis for each economy. However, this exact accumulation of huge amount of USD denominated foreign reserves could aggregately cause volatility in international capital movements by creating excessive global USD liquidity.

Getting Prepared for the Unexpected

The theory that the world witnesses an economic crisis every decade has been proven wrong. However, there is a logical puzzle called the “unexpected hanging paradox” (please google it, if you did not know it), which suggests that the unexpected event (a crisis) comes when we least expect it. As such, we need to carefully monitor vulnerability and potential risks confronting the regional and global economy.

Reflecting on the Asian Financial Crisis of 20 years ago shows there was a currency mismatch problem with excessive dependence on the USD in trade, investment and financial transactions in the region. That problem has still not been resolved, although the ASEAN+ 3 region has become more integrated in terms of trade, investment and financial transactions over the past two decades. Yet, dependence on the U.S. dollar in the region remains large – the share of local currency usage in both trade and investment is still lower in most countries in the region.

In 2018, China and Japan took big steps towards resolving their longstanding tensions. Based on this foundation, we could expect there exists a ground for possible initiatives that will further contribute to resilience in the ASEAN + 3 economies, such as the promotion of local currency use, and the enhancement and/or new plans of the regional financing arrangement, for example.

Various attempts have already been made to reduce the excessive dependence on USD and to facilitate the usage of local currencies. Initiatives such as more direct settlements in local currencies and direct quotation for them are also being implemented.

In the long term, if the international financial system remains too dependent on the USD as it currently is, cross-border capital flows and the global economy’s growth momentum will continue to be strongly affected by Fed decisions, which are corresponding to only U.S. employment and prices. It is therefore necessary to establish a multilateral international financial system where, in addition to the USD, other strong currencies such as the Euro, the RMB and the Japanese Yen play a greater role in international trade and finance.

Finally, international forums such as the G20 and the various international organizations should be used as a means to achieve international coordination towards financial stability and avoiding possible currency and economic crises in emerging market economies. Strong coordination is required among all players of the international financial system to prepare for the next crisis that could hit us.