East Asian countries conduct heterogeneous exchange rate and monetary policies with their exchange rate regimes varying across the continuum of fixed-to-floating. This is causing unlimited exchange rate flexibility within the region and little comovements against the US dollar, the world invoice currency. While the international macroeconomic policies are heterogeneous in East Asia, production within the region has steadily evolved, with China becoming the platform of final stages of assembly and exporting to the United States and elsewhere. An unsustainable payment imbalance grew in the US and it was substantially mirrored in the reserve accumulation by East Asian countries. The world economy faced economic and financial crises not seen since the Great Depression. All the major economies suffered a prolonged economic slowdown. A disorderly unwinding of the global imbalance has indeed begun. It is coming through uncoordinated changes in relative prices and switching expenditures across tradables and non-tradables. East Asian exchange rates are now on a path of real appreciation but in an environment of no explicit coordination. An undesirable outcome will be significant real misalignment within East Asia. This paper thus estimates the impact of intra-regional real exchange rate flexibility on East Asian exports. The hypothesis is that the impact would be negative for East Asian countries regardless of their exchange rate regimes. The findings show that for Chinese exports the long-run effect is as much as that of a real appreciation of Renminbi. By contrast, for Japanese exports the effect is three-times larger than that of a real appreciation of Yen. The findings indicate that neither a unilateral dollar pegging by China nor a freely floating regime by Japan stabilized movements of their currencies against other regional exchange rates. The study suggests that a regional currency basket mechanism would lessen the adverse effect of intra-regional exchange rate flexibility and engineer a collective exchange rate adjustment for resolving global payment imbalance against East Asia.

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