1. Internationalization of the Yen.

Circumstances surrounding the yen have changed quite dramatically inside and outside Japan in the past few years, and we are now witnessing some serious discussion about how to enhance the international role of the yen. The birth of an international currency, the euro, which was a long awaited dream of the European countries, was introduced to the international currency, financial and capital markets this year, and has the potential to challenge the dominance of the dollar.

Just before the introduction of the euro, when a search for a new international monetary system was just starting, the Asian monetary crisis suddenly erupted with the depreciation of the Thai baht in July 1997. The crisis added new steam to the debate over a new international monetary system because one of the reasons for the Asian crisis was the fact that the Asian monetary system was too closely linked to the US dollar.

We are already witnessing some steps towards the creation of a new international currency system, not only the birth of the euro in Europe but also discussions on dollarization in Latin America. What should be done in Asia at a time when such a major tide is flowing? Should we not seriously consider creating a system (such as a currency basket system with a heavy weight on the yen), around the yen, which is the currency of a major economic power and has a strong link with other Asian countries? Will Japan not be contributing to the growth of Asia and to the stabilization of the international currency system, and ultimately to the stable development of Japan if it takes positive measures to encourage the internationalization of the yen and shares the international responsibilities that would follow?

Some measures have already been taken towards the internationalization of the yen such as the Japanese Big Bang which aimed to strengthen the Tokyo financial markets, the home markets of the yen, as international financial markets. But there is still much scope for further development including greater usage of the yen in trade transactions.

The Institute will continue to study the problems related to the internationalization of the yen and their solutions. As part of this endeavor, IIMA serves as the secretariat for the "Study Group on Enhancing the Internationalization of the Yen" sponsored by the International Bureau of the Ministry of Finance. (September 1999)

2. Development Strategy for Emerging Countries: "Evaluating the Regulations on Capital Transactions".

It is crucial for the developing countries of Asia and Latin America that there is an abundant and stable inflow of foreign capital in order to continue their economic development. However, it is also clear that a rapid and large scale outflow of foreign capital was the direct cause of the crises in Mexico, Asia and Brazil in recent years. In order to cope with this problem, Chile was the Latin American country that adopted foreign capital inflow regulation in 1991, and in Asia, controls on capital transactions were imposed by Malaysia in 1998.

At IIMA, we are focusing on "capital account transaction policies" of emerging countries. These are some of the questions we are posing. What is the best way to evaluate foreign exchange and capital inflow regulations? Is there an effective foreign capital inflow policy that will avoid another monetary crisis? Will direct investment be a solution? What measures should the recipient countries take? (July 1999)

3. Current Situation and Prospects of Asian Financial Markets and their Systems.

The Asian financial markets and financial systems have been a major area of interest for the Institute since its establishment, and we have done much research and study on the financial markets, especially the funds and foreign exchange markets. This area will remain one of the key aspects of our future studies. Many theories have been discussed as to the cause of the Asian monetary crisis, but the more important thing is to effectively apply relevant remedies.

First, the private capital available in the Asian region and in Asian economies should be used as much as possible to decrease dependency on capital from outside the region. It is also necessary to encourage the inflow of "good quality" capital from outside the region, i.e. long-term and denominated in Asian currencies.

This year the Institute will carry out studies on the current situation of the domestic financial markets of the major Asian countries, especially on the situations and problems of the bond markets and the measures taken to improve their circumstances. We will take into account in analyzing the situation of the government and quasi-government bond markets how the instruments of monetary operation applied by monetary authorities are changing. The study will expand to the corporate bond markets, too.

These studies will help bring to the surface the measures that should be taken to encourage the development of bond markets as well as the conditions for the further growth of those markets. We will also consider what kind of cleaning and settlement system is preferable for the region as well as for the each economy.

The Institute has carried out studies on the situations and the future prospects of the foreign exchange markets of Asian countries since its inception. These will be continued this year in parallel to the analysis on bond markets.

The second major cause of the crisis, along with questionable macro economic and foreign exchange policies, was the extreme weakness of the financial institutions in these countries. The weakness in the banking sector turned out to be a key factor in aggravating the crisis. Restructuring of the banking sector will be crucial, not only as a short-term objective of genuine economic recovery, but also as the long-term objective of getting back to sustainable economic growth. The local banks which experienced serious setbacks during the crisis are key to the future economic activities as core financial institutions in their countries. The Institute will study the local banks of Asian countries, the structures of the banking sectors, the management systems and problems facing large, medium and small-sized banks respectively, and the tasks facing the financial industry. (July 1999)

4. The New International Currency, the Euro, and the Restructuring of European Financial and Capital Markets.

The euro has been one of the key areas of interest since the establishment of this Institute. We will concentrate on the following aspects of this new currency.

The new European currency, the euro, was born in January this year. Will it serve its purpose as a stable, single currency? How far and how quickly will the new currency be accepted as a means to invigorate the European economy through corporate competition and to enlarge and deepen the European financial and capital markets? What role will it play as an international currency? These will be the areas of key interest. (July 1999)

5. "Study Group on the International Economic and Financial System" -A Study Group Commissioned by the Ministry of Foreign Affairs.

The study group is carrying out an analysis of the cause of the 1997 Asian financial crisis and writing a recommendation on the future international economic and financial system. The group is analyzing the ways to overcome the currency, financial and economic crises that had spread to other developing countries and how to avoid the recurrence of such crises by studying the international economic fundamentals of finance, trade, investment and development. The study group was launched last fiscal year and will continue throughout this fiscal year. (April 1999)