Emerging Asian currencies, which already appreciated by a large margin versus the JPY shortly after the election of Shinjo Abe as Japan’s prime minister, appreciated even further after BoJ’s announcement on monetary policies, clouding the outlook for economies and assets in the region.
Axa’s IM analysis pinpoints the key recipients of Japanese financial flows in Emerging Asia, i.e., the economies in the region that will potentially benefit from Japan’s excessive easing.
Currently, more than 7% of Japanese bank lending is cross-border lending to emerging Asia, and according to Axa, the trend will most likely accelerate after the BoJ’s unprecedented monetary easing was announced, since interest rate margins are more favorable in Emerging Asia than in Japan.
Japanese portfolio investors primarily favor assets issued by Emerging Asian issuers over other emerging market regions
Axa IM classifies the various economies in Emerging Asia as belonging to one of three different groups depending on the share of domestic lending contributed by Japanese banks. In the first group, they position countries where the share overshoots 10% of total domestic lending, hovering at around 15% (Singapore and Thailand). In the second group, they have countries where the share is between 5% and 10% (Indonesia, Hong Kong and Philippines). And in the third, the share is below 5% (China, Taiwan, India, Korea and Malaysia).
The four economies in the region where credit growth is the most excessive are also the four locations where the share of lending by Japanese banks to total domestic lending is the highest (Singapore, Indonesia, Philippines and Thailand).
Another channel through which Japanese liquidity is finding its way to Emerging Asia is through portfolio investments, which include the purchase of stocks and bonds (sovereign and company debt instruments).
Portfolio investment by Japanese investors to emerging markets has been growing steadily since 2002, from 2.5% of total Japanese portfolio investment abroad in 2002 to 4% in 2011. Japanese portfolio investors primarily favor assets issued by Emerging Asian issuers over other emerging market regions.
Japanese portfolio investors continue to prefer mostly equities in China, Taiwan, India, Thailand, Indonesia and Singapore, while they prefer debt securities in the Philippines, Korea and Malaysia. In 2011, they began holding more debt securities in Thailand, India, the Philippines and Korea.
Japanese liquidity finds its way to Emerging Asia through Foreign Direct Investments (FDIs) as well. Japanese FDIs are particularly large relative to the size of the economy in Singapore and Thailand.
According to Axa’s analysis, Korea and Thailand have the potential to attract more Japanese FDIs, while Singapore and Hong Kong more portfolio investments. Thailand and Singapore will attract more lending from Japanese banks, too. “These findings are further supported by stock valuations, namely the P/Es which signal that these economies are the cheapest in Emerging Asia, as well paving the way to more financial flows from Japan”, concludes the report.