Japan's Financial Bridge to Indonesia
A New Bilateral Currency Swap May Pave the Way for More Cooperation
Jul 30, 2009
Since the Asian Financial Crisis of 1997, Asian economies have been highly preoccupied with the stability of the regional financial system. To a large extent this preoccupation has prompted an increase in foreign currency reserves, or the “savings glut," in many Asian states that ultimately funded the consumer habits of the United States. However, increased reserves alone cannot guarantee stability. Consequently, in 1997 the Association Southeast Asian Nations (ASEAN) plus China, Japan, and South Korea launched the Chiang Mai Initiative, which set up several bilateral currency swaps to increase the liquidity of the system and prevent the dual mismatches of loan maturity and currency denomination that contributed to the collapse of the Thai baht, Indonesian rupiah, and South Korean won. With the most recent global financial crisis, the Asian region has once again turned its attention the security and stability of its regional financial system.
Efforts Toward Stability and Leadership
Japan, fearful of losing its regional prominence to the juggernaut that is China, has taken the lead in fortifying the existing financial institutions to prevent a repeat of the 1997 events. In May 2009, Japan and China both increased their contributions to the Chiang Mai Initiative by $38.4 billion. Japan, however, then offered an additional ¥6000 billion (approximately $61 billion) in assistance to countries affected by the recent global financial crisis. Early in July 2009 Japan and Indonesia arranged for a precautionary currency swap should the crisis have a profound impact on the Indonesian economy, though both governments claim that the swap is strictly a precautionary measure and that there is no immediate intention to make use of the arrangement.
The timing of this swap is noteworthy as only a few weeks later the International Monetary Fund recommended to Indonesia that it shore up its currency reserves. Bilateral currency swaps with Japan may prove to be a relatively cheap and efficient way for Indonesia to achieve this goal. While this implies greater stability and possible continued growth of Indonesian economy, the swaps may also have profound effects on the bilateral relations between Japan and Indonesia.
Implications of the Swap
These new currency swaps between Japan and Indonesia may symbolize a new wave of financial and economic cooperation between the two states. Japan and Indonesia have a long and, at times complicated, history that includes imperialism, development, and trade. Since the 1970s Japan has provided Indonesia with overseas development assistance (ODA) and foreign direct investment (FDI). Such assistance and investment has increased the industrial capacity of Indonesia in various sectors, such as manufacturing. Indonesia is especially attractive as a Japanese investment destination because of its vast energy resources, which are sorely needed by the Japanese archipelago. Indonesian industrial sectors have particularly benefited from Japan’s attention, but so have its natural resource sectors. Prior to Japanese investment, Indonesia lacked the capability to access some of its oil and natural gas deposits. This has changed in some cases since Japan entered the market. If the currency swaps increase the interaction between the two states, it is possible that more joint energy ventures will emerge between Japan and Indonesia.
It also stands to reason that the bilateral cooperation via the currency swap may stimulate reciprocal activity in other financial areas. The Indonesian government recently sold ¥35 billion (approximately $374 million) in 10-year samurai bonds in a move to provide funds for President Susilo Bambang Yudhoyono’s stimulus and widen the market for Indonesian Treasury bonds. Just as Japan has actively invested in Indonesia to seek higher yields, it is possible that this increased financial interaction may encourage Japanese investors to explore other Indonesian assets.
In the interim, the bilateral currency swap is an important arrangement for both governments. For Indonesia, it creates an additional stream of liquidity to prevent a dry-up of the capital that is needed to continue its economic growth. Meanwhile, the swap will help Japan defend its role as a regional leader, at least for the immediate future.
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