Faced with the US financial crisis, Japan's Finance Minister Shoichi Nakagawa suggested that the International Monetary Fund (IMF) should establish a framework to ensure financing for emerging economies in case of an emergency, as a means to prevent financial crises from victimizing emerging markets. The proposal captured worldwide attention immediately and was regarded as another framework that Japan had put forward to challenge the US dollar system since the East Asian financial storm ended.

After the Asian financial storm Japan took the lead by offering to set up an "Asian Monetary Fund" with $100 billion out of its own pocket. Then US Treasury Secretary Robert Rubin saw this initiative as a challenge to the US dollar system and promptly shot down the idea by branding it a threat to the International Monetary Fund's authority.

Actually there is no fundamental difference between the two solutions proposed by Japan. Both stressed using the Japanese system to make up for the shortcomings of the IMF and share the latter's functions. It is widely known that the IMF is the center pillar of the US-led international monetary system established after World War II. It is in charge of adjusting the provision of global liquidity and plays the role of "the final lender". In short, it is an instrument to secure the US dollar's hegemonic position.

To break the US dollar hegemony the IMF's functions must be taken and its role reduced. That's the motive behind Japan's new concepts of targeting the IMF by offering to "share" its responsibilities. The objective of Japan's strategy, meanwhile, is to establish a yen-dominated international monetary system. Here no choice is more reasonable than creating the "Asian dollar", which is also the destiny of the yen Japan has been dreaming about for over 130 years.

The thing is, although the current US financial crisis has damaged the market credibility of the US dollar, it is no obvious condition for the birth of the "Asian dollar". The reason is that, as a key criterion for having a single regional currency, Asia must achieve "inflation parity" first.

Right now the world is seeing widespread inflation, but in Asia the levels of inflation are very uneven. Japan, in particular, still enjoys an inflation rate way below the 3-percent "standard", while other countries in the region are in the typical state of inflation and even high inflation. This is a matter of regional structure rather than of prosperity cycle.

To achieve "inflation parity" there must be "free human movement within the region" first. But in Asia, with its dense population, large gap between rich and poor and diverse levels of economic development, neither Japan nor any other Asian nation can afford free human movement. Furthermore, a single regional currency also needs adequate funds and capital markets to lean on, which means Asia must unify equity and securities markets, which cannot be realized overnight or brought about by the US financial crisis.

The "Asian dollar" may be described as a dream shared by all people in the region. It may also be the common strategy of the region. However, there are usually many real conditions to meet before strategies can be fulfilled. Without committing to meeting all the real conditions a strategy will most likely remain a reverie at best.

The author, Liu Junhong, is a researcher with China Institute of Contemporary International Relations

(China Daily October 22, 2008)