The Possibility of Forming a Yen Bloc Revisited

The latest crisis in Asia has vividly illustrated that the traditional exchange rate policy of pegging to the U.S. dollar can be incompatible with macroeconomic stability in the Asian countries. To insulate themselves from the adverse effect of a widely fluctuating yen-dollar rate, these countries should peg their currencies closer to the Japanese yen by targeting a basket of currencies in which the yen carries a substantial weight. By reducing the foreign exchange risk associated with yen-denominated transactions, this major shift in Asia's ex change rate policy should promote wider use of the yen as a regional currency and capital inflow from Japan into the Asian countries, paving the way for the formation of a yen bloc.