Toshinori Doi on regulating digital finance

Aashna Agarwal (GH): What are the risks associated with the digitisation of finance and how can they be mitigated?

Toshinori Doi (TD): A lot is new compared to what we had. New players are providing new services and new instruments are coming up, including in the crypto currency areas. The challenge will be for the regulators to make sure that they are not behind the curve, that they understand the issues and that they have the right policy tools to deal with them. But at the same time, it is important to make sure that you are not going to kill this animal. Just because one does not know it doesn’t mean one can kill it. So it is better not to ban certain types of transactions, but to make sure that things are under control.

GH: Japan is a model to follow for the way it has been directing finance to the productive economy. It is an extremely sophisticated economy. How has it kept this balance?

TD: When you say ‘directing finance’, I think what you have in mind, is, some things that we have been doing right after World War II in our construction of it. Though these are largely over right now, the way we handle our finances is basically like the market player. And the kind of issues that we are facing right now is that there’s an abundance of resources and liquidity within our system. For example, the Japanese corporations are holding on to more than ¥200 trillion of liquid assets, which is equal to more than 40% of our GDP. But they are sitting on this huge pile of liquid assets without making any productive investments. So, the Japanese government’s current challenge is to persuade Japanese corporates to put those liquid assets to more productive use–including raising wages for workers, paying back shareholders and making investments. This is the new set of challenges that we are facing right now.

GH: What does the new ‘High Spending, State Spending’ era of President Xi Jinping mean for Asian economies like India and Japan?

TD: That is a difficult question, but the fact that China is starting to be active in international finance could be a positive development for Asia. And if things go wrong, the people in some Asian countries are in danger. So, for countries like India and Japan, where we have good governance, additional finance from China will really not be too much of a problem, but for countries that have rather weak governance, having a financier like China could potentially cause problems for the domestic economy. So we will have to engage China in a positive way so that its increased economic activities benefit not only itself, but also the other countries in the region.

GH: So this relates to the Belt and Road Initiative that China has propagated.

TD: I think the challenge for us is to make the Belt and Road Initiative work for everybody.

GH: How can developing and developed countries engage and compete successfully with the formidable combination of China’s market dominance and economic statecraft?

TD: First of all, every country should try to strengthen its own economy. Going beyond that, it is important to engage China in a way that the Chinese play by international standards and norms. When it comes to some of the activities that China engages in, they do not follow the existing standards and norms—and it’s up to the international community, including the G20, to come up with a new set of standards and norms that countries, including China, can play by. By doing that, we can set a level playing field for everybody and that will, hopefully, engage China in a way that benefits all the other countries.

Toshinori Doi is President, Policy Research Institute, Japan.

Aashna Agarwal is Content Coordinator, Gateway House.

This interview was exclusively created/recorded by Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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