One of the possible consequences of a future unwinding of global payments imbalances is a rapid, steep depreciation of the US dollar and upward pressure on the East Asian currencies. This poses a serious challenge for East Asia's exchange rate arrangement and financial architecture. Sharp US dollar depreciation can cause disruptive financial damages to the East Asian economies if not managed in an appropriate way. To avoid such disruptions and maintain financial stability, East Asian economies need to let their currencies collectively appreciate vis-à-vis the US dollar, while maintaining intraregional rate stability. Intraregional exchange rate stability is highly desirable because of the deepening economic interdependence among the East Asian economies. This type of response may well constitute an initial step toward a stable East Asian monetary zone, where regional currencies jointly float against the US dollar and are kept stable against each other. After sufficient convergence and with stronger political commitment, East Asia may formally agree on intra-regional exchange rate stabilization, which may lead to an Asian Snake or an Asian Exchange Rate Mechanism.
Professor Masahiro Kawai is the Head of the Asian Development Bank's Office of Regional Economic Integration (OREI). Concurrently, he is Special Advisor to the ADB President in charge of regional economic cooperation and integration. Prior to his assumption as the Head of OREI in October 2005, Prof. Kawai was a Professor at the University of Tokyo's Institute of Social Science. Prof. Kawai also worked as Chief Economist for the World Bank's East Asia and the Pacific Region from 1998 to 2001, and as Deputy Vice Minister of Finance for International Affairs of Japan's Ministry of Finance from 2001 to 2003. He served as a consultant at the Board of Governors of the Federal Reserve System and at the International Monetary Fund, both in Washington, DC. He was also Special Research Advisor at the Institute of Fiscal and Monetary Policy in Japan's Ministry of Finance, and a visiting researcher at the Bank of Japan's Institute for Monetary and Economic Studies and at the Economic Planning Agency's Economic Research Institute. He graduated from the University of Tokyo's Faculty of Economics and earned his Master's degree from the University's Graduate School of Economics. He received his Ph.D. in Economics from Stanford University.