Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang
Chapter 1: Introduction: A New Financial Market Structure for East Asia
1. Introduction: A new ﬁnancial market structure for East Asia Takatoshi Ito, Yung Chul Park and Yunjong Wang A general consensus is that East Asia’s rapidly growing economies ran into crisis because of the vulnerability of their ﬁnancial sectors. A frequently cited cause of the crisis was East Asia’s heavy reliance on short-term capital borrowing for long-term domestic investment together with unhedged borrowing in foreign currency set oﬀ a double mismatch (maturity mismatch and currency mismatch). This double mismatch problem was in essence born out of the ﬁnancial sector vulnerability. The East Asian ﬁnancial structure in general lacks proper infrastructure, which leads to the ineﬃcient allocation of high savings and the excessive short-term debt market. Accordingly, discussion on building an eﬃcient ﬁnancial system in East Asia is taking two main directions. The ﬁrst direction suggests enhancing appropriate prudential supervision and regulation of the banking sector. The second direction advocates creating stable sources for the long-term capital market. To that end, a plan to invigorate the domestic bond market has been suggested. Development of a domestic bond market will resolve the double mismatch problem by reducing the excessive dependency of East Asian economies on the advanced ﬁnancial market centers. Despite high savings, East Asia’s dependency on other ﬁnancial centers outside the region is relatively high. Both capital exporters, such as Japan, and capital importers coexist in East Asia: however, at the regional level, the ﬁnancial centers have not properly played their intermediary role. Furthermore, there is no strong region-wide...