Asian policymakers braced for a flood of capital unleashed by the Bank of Japan's huge monetary stimulus, but some conceded on Friday the impact on global money flows and currencies might prove to be a necessary side-effect to get the region's No 2 economy growing.
New BoJ Governor Haruhiko Kuroda on Thursday promised to inject about $1.4 trillion into the Japanese economy in less than two years and committed the bank to open-ended asset buying, a dose of shock therapy officials hope will end two decades of stagnation. The stronger-than-expected measures, which appeared to catch other regional officials by surprise, spurred a sharp sell-off in the yen across the board and risked upsetting other Asian exporters who may lose competitiveness.
A resurgence of the carry trade - borrowing cheap yen to invest in other higher yielding assets - has also been a sore point around the region, but policymakers played down concerns about damaging and distorting impacts on asset prices and currencies. "We can't say for sure whether this policy will lead to a yen carry trade and flooding in cheap foreign funds (on the local markets) because there are a lot of stages that such a policy has to go through before leading to actual carry trades," senior official at the Bank of Korea said, adding that officials there had not been informed in advance of the BoJ's plans.
"Even if the BoJ succeeds in expanding the base money liquidity, you can't say for sure the extra money will flow out of Japan in the form of short-term money." The Hong Kong Monetary Authority echoed South Korea's wait-and-see approach, while Singapore highlighted the importance of rebooting the dormant Japan economy. "It is in everyone's interest that Japan is able to reflate its economy, it is a challenge and they are attempting a new approach. But it is in the interests of the rest of Asia that they succeed," Tharman Shanmugaratnam, Singapore Deputy Prime Minister and Finance minister, said on the sidelines of an ASEAN meeting on Thursday.
"I think that capital flows are a corollary rather than an objective of their policies, likewise exchange rates are a corollary. The fundamental policy is one of domestic monetary policy rather than capital flows and exchange rates." Currencies such as the Thai baht and the Australian and New Zealand dollars - traditional favourites of the other side of carry trade - gained sharply.
The Thai currency hit 30.096 to the yen, its strongest since 2008 May. However, Bank of Thailand Deputy Governor Pongpen Ruengvirayudh, said capital flows into Thailand were still normal and the baht's moves were in line with regional currencies. "Japan is not our competitor and Thai exports to Japan are mainly food and necessities," Pongpen said. "If Japan has more confidence, consumption will increase and that will benefit us. ... The injected money will be in their country first but some will come to us."
Tim Jagger, fund manager with Aviva Investors in Singapore, said the BoJ move was good for Asian rates and spread products. "We see a lot of people looking to chase local rates lower - Philippines, South Korea, Thailand could be some of these rate markets that will benefit," Jagger said.
"QE is creating strong demand for risky products as the world increasingly has a yield problem - where will you get it from as you have liabilities which need to be paid for by borrowers." Australia and New Zealand are particularly well-placed to benefit from yen carry trades as their triple A-rated government bonds pay some of the highest yields in the developed world.
"Institutional investors in Japan will be forced to move away from JGBs into other fixed income products. Given the relatively small amount of non-JGB Japanese fixed income product, we can see significant flows into offshore fixed income with global credit also benefiting," said Krishna Hegde, Barclays credit strategist. India, which relies on significant funding for much needed infrastructure from Japan, welcomed the prospect of more capital flowing in.
"In Brazil and some other place, any large inflows can cause appreciation of the local currency," said an Indian policymaker who asked not to be identified. "In India, because of our current account deficit, we welcome capital flows because it helps to finance our current account deficit." A senior official in the Ministry of Finance, speaking on condition of anonymity, said: "It is a net positive for India. "This should boost capital inflows and help finance our current account deficit. If the Japanese economy responds to the monetary stimulus, it should help our exports also, as Japan is one of India's major trading partners."