This paper examines the current situation pertaining to trade and financial integration in East Asia from various approaches and discusses potential linkages between intra-regional trade and financial integration. This paper also offers policy suggestions based upon its analyses that take full account of the post-global crisis policy landscape. The main conclusions drawn from this study are as follows: (i) the overall degree of intra-regional trade and financial integrations in East Asia still remain insufficient, as the region’s financial integration lags far behind its trade integration; (ii) inter-regional links appear stronger than intra-regional links in East Asian economies; and (iii) intra-regional trade and portfolio investment flows in East Asia generally show positive correlations. Developing East Asia would benefit from wider regional mechanisms with the enhancement of intra-regional trade and financial integration. Since East Asia is at a critical turning point, this paper suggests that East Asian countries strive to strengthen the regional mechanisms with smoothly functioning, integrated regional markets while effectively controlling its risks. They should focus especially on enhancing trade policy cooperation, expediting capital market development, effectively managing cross-border portfolio investments, and strengthening regional safety networks. The three major countries in the region―Japan, China, and Korea―should take the lead in facilitating the integration process.
Keywords: Trade and Financial Integration; Cross-Border Investment and Settlement; Trade-Finance Linkage; Free Trade Agreements; Asian Bond Market; East Asia; Global Economic and Financial Crisis
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.