“Financial Risk and Crisis Management after
the Global Financial Crisis” Series No.6 (3/2016)

Capital Flow, Exchange Rate andFinancial Risk Management in Asia 1－Roles and Issues of Intra-Regional
Financial Cooperation－

Junko Shimizu iProfessor, Faculty of Economics, Gakushuin University

This document is an English translation of the original Japanese, which appears
in the Mar. 2016 edition of The Japan Economic Research Institute Monthly
Report, published by The Japan Economic Research Institute.
1

Introduction
With the Fed rate hike and continuing low oil prices in late 2015, theslowdown of the Chinese economy has brought a drastic backslide of theworld’s stock markets in the opening days of 2016. The emerging
countries who largely rely on the export of resources, including not only
China but also Brazil, Russia, South Africa, Indonesia, and others,
implemented successive policies that allowed their own currencies to be
cut and devalued. Asian countries, being strongly related to the Chinese
economy, were no exceptions; the Indonesian rupiah and Malaysian
ringgit are both hitting lows not seen since the 1997 Asian currency
crisis. In particular, since the “China shock” of August 11, 2015 when
China devalued the RMB against the US dollar, the world’s stock
markets have been notably swayed by reports on the Chinese economy.
While Asia’s emerging countries continue increasing their presence andinfluence in the real economy, it has been emphasized that they are
predisposed to broader variation in exchange rates and stock prices
yielded from the global capital flow, which set the backdrop for the global
financial crisis. In the aftermath of the Asian currency crisis, theregional bilateral currency swap arrangement (the Chiang Mai Initiativeor CMI) was constructed by thirteen Asian countries—the ten countries
belonging to the Association of Southeast Asian Nations (ASEAN) alongwith Japan, China, and South Korea—as a defense against a new crisis.
This arrangement considers recent international economic and financial
conditions and attempts to strengthen the regional responses against
potential financial crisis. Without a doubt, we need to create morepractical regional economic surveillance procedures and strengthen thecoordinated exchange rate policies. This paper provides an overview ofchanges in capital flow to Asia since the global financial crisis, analyzing
the factors that influenced Asian capital flows. It also observes Japan’srole in Asian financial cooperation.

1. Changes in Capital Flow to Asia after the Global Financial
Crisis
1.1 Overall Asia-wide Trends
Let us begin by observing the capital flow trends to Asia during andafter 2010. Figure 1 displays the trends of capital inflows to 11 Asiancountries (China, Hong Kong, India, Indonesia, South Korea, Malaysia,
the Philippines, Singapore, Taiwan, Thailand, and Vietnam) divided as
per foreign direct investment (hereafter, FDI), portfolio investment(hereafter, PI), and other investment (hereafter, OI). According to thedata, after 2010 as well, when the global financial crisis worsened into asimultaneous global economic downturn, direct investment capital flows
persisted across Asia; however, these flows were greatly constricted in
Q3 2015, after the China Shock, notably falling to their lowest levels
since 2010.
Figure 1. Capital Flows into Asia (Total: 11 Asian Countries)

Direct Investment

USDmn

Portfolio Investment

Other Investment

500,000
400,000
300,000
200,000
100,000
0-100,000-200,000

Data sources: Balance of Payment (IFS, IMF), Taiwan data from CEIC

Next, Figure 2 indicates the movements in Asian currency exchange
rates versus the US dollar since 2010.
Excluding the Hong Kong dollar, which is pegged to the US dollar, we
can observe volatile movement in almost all Asian currencies. Asiancurrencies, except the Japanese yen, comprise currencies of emerging
countries. Since the global financial crisis, large amount of capital inflow
has been observed in the emerging countries because of their relatively
high interest rates and high growth rate than advanced countries. From
January 2010 to mid-2014, currencies (excluding the Indonesian rupiah,
Indian rupee, Japanese yen, and Vietnamese dong) were steadily gaining
their value. However, after the Fed's quantitative easing diminished,capital outflows began from the emerging Asian countries, and then theunderlying tone for Asian currencies has been largely negative since2015. Of particular note are the weakening trends of the Malaysian
ringgit and Indonesian rupiah.
Figure 2. Asian Currencies vs. USD (Jan.2010 = 100)(Jan.2010=100)
China
160
Japan
150
Singapore
140

Hong Kong
South Korea
TaiwanIndia
Malaysia
ThailandIndonesia
Philippines
Vietnam

130
120
110
100
90
Jan.2010
Apr.2010
Jul.2010
Oct.2010
Jan.2011
Apr.2011
Jul.2011
Oct.2011
Jan.2012
Apr.2012
Jul.2012
Oct.2012
Jan.2013
Apr.2013
Jul.2013
Oct.2013
Jan.2014
Apr.2014
Jul.2014
Oct.2014
Jan.2015
Apr.2015
Jul.2015
Oct.2015

80

Data source: IFS (IMF), Taiwan data from CEIC

Although FDI remained stable and continued flowing into Asia despite
worsening international financial market conditions, observing thecapital flow into Asia versus the movements of the VIX index, frequently
used to express degrees of risk aversion in financial markets, allows us
to understand that an increase in financial markets’ risk aversion
results in capital outflows from Asia particularly in PI and OI. Duringcrises, these capital outflows drive a selloff of Asian currencies andpurchase of the yen as a safe haven currency, often skewing theexchange rates between the yen and other Asian currencies versus thedollar.
Of all the Asian currencies, the Chinese renminbi (RMB) was thestrongest at the close of 2015; it had appreciated approximately 50%
against the Japanese yen (which had depreciated almost 50% against
the US dollar since the end of 2012). However, this trend of a stronger
RMB versus a weaker yen reversed at the end of 2015, and the yen began(and continues) gaining value. Therefore, over a six-year period,
exchange rates between the Asian currencies have changed significantly.
Figure 3 demonstrates the amount of foreign reserves held by Asian
countries since 2010. According to this data, Asian countries’ foreign
reserves peaked in October of 2014, consequently trending downward.
This coincides with the downward shift of the exchange rates for Asiancurrencies against the US dollar and we can easily guess that Asian
central banks have conducted the foreign exchange intervention to
support their currencies. Nonetheless, if we compare the amount offoreign reserves between January 2011 and the end of 2015, the foreign
reserve levels of all countries, except Malaysia, were still at theirhighest; these countries were not worried about a sudden fall of theircurrencies against the US dollar. However, for Malaysian ringgit, which
had devalued more than 40% since 2014, it was perilous to consider areduction in foreign exchange reserves.
Figure 3.

(USD bm)
7000

Asian Countries' Foreign Reserves

China
South Korea
TaiwanHong Kong
Malaysia
ThailandIndia
Philippines
VietnamIndonesia
Singapore

6000
5000
4000
3000
2000
1000

Jan.2010
Apr.2010
Jul.2010
Oct.2010
Jan.2011
Apr.2011
Jul.2011
Oct.2011
Jan.2012
Apr.2012
Jul.2012
Oct.2012
Jan.2013
Apr.2013
Jul.2013
Oct.2013
Jan.2014
Apr.2014
Jul.2014
Oct.2014
Jan.2015
Apr.2015
Jul.2015
Oct.2015

0

Data source: IFS (IMF), Taiwan data from CEIC

1.2 Trends in Capital Accounts per Country
A bidirectional relationship exists whereby movement in Asiancurrencies not only greatly influences capital inflows and outflows forthe particular countries, but expectations toward future h values forthese currencies also influence capital flows. Considering this, let us
examine the capital inflows and outflows per country (Fig. 4a and 4b).
The figure demonstrates that, with the exception of Hong Kong, whose
currency is pegged to the dollar, almost all countries have a strong
positive correlation between their exchange rates against the US dollar(right axis: downward motion indicates that the country’s currency
depreciation) and losses in capital accounts. In China, the direct
investment that had been steadily coming in was halved in Q3 2015 incomparison with the previous quarter, after the China Shock of August
2015. In contrast, stepwise regulatory easing in cross-border securities
investments (QDII, or Qualified Domestic Institutional Investor) led to
the foreign securities investments ever made in 2014, and the balance of
PI crossed into the red. In Hong Kong, although FDI and PI trended
fundamentally positive up to mid-2014, a blunted Chinese economy andexpectations of RMB depreciation decreased foreign investors' demands
for Hong Kong assets; fears about a fall in the HKD and capital outflows
from that market began to increase. Since 2015, withdrawals occurred in
PI and dramatic reductions in FDI inflows were occurred in Q3.
In India, where markets enjoy a relatively positive economic
environment, FDI continues to pour in, and although stable capital
inflows existed through stock investment, a portion of securities
investments turned from inflow to outflow in Q2 2015. Foreign
investment by domestic investors is not yet widespread in India. In
Indonesia, although FDI inflows continued (albeit weakly) and PI
continued to flow into the stock and equity markets, this phenomenon
lasted only until Q3 2015, when the inflow turned into a slight outflow.
In South Korea, while there is a constantly positive current accountbalance, this is in contrast to FDI, PI, and capital accounts which are alltrending in the red. The withdrawal in incoming securities investments
in Q3 2015 due to the expectation of the Fed tightening is of particularsignificance. In Malaysia, capital inflows from FDI were alreadystagnant by 2010 and the balance of FDI was in the red. This occurred
amid a backdrop of rapid growth of overseas investment by domestic
firms and major banks in recent years. Furthermore, a withdrawal of
capital flow into PI coincided with newly-sparked overseas investment
by domestic institutional investors, and capital outflows increase d.

Figure4-a.

The Exchange Rates (vs. USD) and Capital Flows in Asian Countries(FDI and PI)

Data source: IFS (IMF)
The local currencies vs. the US dollar exchange rate (quarterly average) takes the right axis.
As it goes down, representing currency depreciation.

Figure4-b.

The Exchange Rates (vs. USD) and Capital Flows in Asian Countries(FDI and PI)

Data source: IFS (IMF)
The local currencies vs. the US dollar exchange rate (quarterly average) takes the right axis.
As it goes down, representing currency depreciation.

In the Philippines, capital inflows are relatively low compared with
their Asian neighbors. Even as net PI fell into the red in 2015, thenegative balance’s relative insignificance meant that currency risk
sensitivity was low and now remains stable. In Thailand, inflows from
FDI declined in and after 2014 and increasing foreign investment fromdomestic firms turned the net FDI negative. Further, in August 2015, as
foreign securities investments from domestic investors expanded after
the Bank of Thailand' announcement of easing restrictions on overseas
security investment by individual investors, net PI turned negative andthe net negative PI balance continues to expand. In Singapore, thevolume of PI are significant and the balance of PI is holding in the red,

supported by a constantly positive current account balance; however,
FDI inflows are trending firmly, and the net FDI continues to stay in theblack.
Since 2015, when expectations of a Fed rate hike intensified, exchange
rates against the US dollar fell; FDI and PI flowed out of some countries,
turning their capital accounts to red. There are various factors behindthese capital outflows; for countries such as Hong Kong, South Korea,
and Malaysia, the increase in capital that had once flowed into thecountry is more striking, whereas in countries such as China andThailand, rapid growth in foreign investment by domestic investors wasobserved. These different manifestations were not only caused by thevariations in political environments and exchange rate regimes/capital
control and regulations, but also by discrepancies in the influence of theChinese slowdown and plummeting resource prices on each country’s
economic situation. This suggests that economic monitoring in Asia is
becoming increasingly critical.

2. What Influences Capital Flow and Exchange Rates in
Emerging Asian Countries?
2.1 A Factor Analysis of Capital Flow for Emerging Countries
The factor analysis that answers the question of what kind of factors
influence capital inflows and outflows in emerging countries has always
been a major issue in international finance. In the years following 1990,
when capital flows were seriously deregulated on a global scale,researchers such as Calvo, Leideman, and Reinhart (1993) andFernandez-Arias (1996) conducted analyses on capital flows for
emerging countries by splitting factors into country-specific internal pull
factors and external push factors. Milesi-Ferretti and Tille (2011)indicate that during the global financial crisis, rapid changes in degrees
of global risk aversion formed a “push factor shock” that erased
investment positions in emerging countries, which manifested in aphenomenon of reversed capital flow. The influence exerted by a new
dimension of monetary policies on capital flow in emerging countries wasanother external factor that garnered attention after the global financial
crisis; the particular economic conditions required for each emerging
country were considered critical for attracting this money generated byadvanced countries from quantitative easing.

Table 1. Factor Analysis on Capital Flows for Emerging Countries, according to
Koepke (2015)
Type

DriverPortfolio
Equity and Debt

Banking Flows

FDI

----+
+
+
-

--?
+++
+++
---

?
?
?
+++
?
-

Global risk aversion

Push

Mature economy interest rates
Mature economy output growth
Domestic output growth

Pull

Asset return indicators
Country risk indicators

--+++
+
?

Strong evidence for negative relationshipSome evidence for negative relationship
Strong evidence for positive relationshipSome evidence for positive relationship
Mixed evidence, no clear relationship

Source: Drafted from IIF Working Paper “What Drives Capital Flows to Emerging
Markets?” (Koepke, 2015)

It is also necessary to recognize what factors influence what kind of
capital flow. Koepke (2015) uses the results from more than 40 previous
research papers to categorize capital flows and the effects of push andpull factors on each, described in Table 1. If we apply this to emerging
Asian countries, then we can see that domestic production growth rates(a country-specific pull factor) consistently and positively influence FDI,
the inflow of which into emerging Asian countries has firmly andoptimistically trended. In contrast, external push factors are not as
influential. In some countries, country risk factors, such as the politicalenvironment, serve negatively influence FDI inflow, which is consistent
with the actual situation. On the other hand, push and pull factors both
negatively and positively affect PI inflow, and with the Fed rate hikefrom the tail-end of 2015, combined with rising geopolitical risk from
North Korea and Chinese economy stagnation, all these elements
negatively affect PI inflow; in other words, this suggests that capitaloutflow will occur.
Beyond the push and pull factors described above, capital flow trends
have also been majorly influenced by movements in short-term capital
inflow, which rely on exchange rate expectations. For example, since theexpectation of a RMB depreciation became the dominant perspective in2015, Asian currencies have been depreciating; however, whencomparing rates from January 2015, the devaluation rate against the US

dollar (as seen in Fig. 5) shows that many Asian currencies have lost
ground against the US dollar larger than the RMB. For countries whose
currencies have depreciated more than the RMB, it is conceivable that
another recent disruptive factor in international finance, the steep
decline in resource prices, is an additional factor at hand. As such, let us
now consider the influences yielded by these factors on Asian currencies
and verify our hypotheses by comparing a broad range of macroeconomic
data.
Figure 5. Devaluation rate of Asian currencies vs. USD (%)（Jan/1/2015 – Dec/31/2015)
VietnamThailandTaiwanSingapore
Philippines
Malaysia
South Korea
Japan
Indonesia
India
China
0.0%

5.1%
9.3%
3.7%
7.0%
4.8%
22.8%
7.6%
0.4%
11.3%
4.8%
4.7%

5.0%

10.0%

15.0%

20.0%

25.0%

Data source: Drafted by author based on Datastream's daily exchange data

2.2 Comparing Asian Countries’ Macroeconomic Data
Since the Asian currency crisis, economic data of emerging Asian
countries has been much more readily prepared, which is an initiative
spearheaded by the IMF. At present, there is a great breadth ofaccessible macro data, primarily from each country’s central bank andstatistics bureau. In this paper, we have drafted Table 2, a comparativetable based on data (expressed in dollars) from the IMF and World Bank.
From this table, let us observe each Asian country’s degree of reliance on
the Chinese economy and fuel exports.
・Reliance on the Chinese economy
Along with its rapid economic growth from the mid-2000s, China’s
imports also trended upward in recent years. Therefore, the influence ofChina’s economic slowdown would be more severe for emerging Asiancountries with a relatively high dependence on the Chinese economy. In
particular, as an impact of the China shock of August 11, 2015 when
People Bank of China (PBOC) devalued the RMB, many Asian currencies
subsequently devalued. As such, if we calculate the scale of exports to
China versus the country’s GDP, we can see that even among Asian
countries, a large variance in export reliance on China (ratio of exports
to China vs. nominal GDP) exists.
Table 2

Macroeconomic Data for Asian Countries

Exports to China vs. nominal GDP (%)
Country

China
Hong Kong
India
Indonesia
Japan
South Korea
Malaysia
Philippines
Singapore
Thailand
VietnamTaiwanFuel exports vs. total exports (%)

2000

2005

2014

2000

2005

2013

Estimated real
GDP growthrate (%)

40.6
0.2
1.7
0.6
3.3
3.2
0.8
5.6
2.2
4.6
1.3

71.8
0.8
2.3
1.7
6.9
6.5
4.0
15.5
4.8
5.6
11.6

87.8
0.6
2.0
2.7
10.3
8.3
2.8
16.7
6.1
8.0
15.5

3.1
0.5
3.4
25.4
0.4
5.5
9.6
1.3
7.3
3.0
26.5
-

2.3
1.5
10.3
27.6
0.8
5.5
13.4
1.9
12.0
4.1
25.8
-

1.5
3.1
20.3
31.6
2.3
9.5
22.3
3.9
17.4
6.0
7.3
-

6.2
2.9
7.6
5.7
0.7
3.5
4.9
6.5
3.2
3.3
6.1
2.2

Data source: China exports vs. nominal GDP ratio calculated by author from IFS,
DOTS (IMF). Fuel exports vs. total exports from World Bank. Estimatedreal GDP growth excerpted from IMF World Economic Outlook, Oct2015. Imports / foreign reserves (No. of months) calculated by author
from average monthly imports in 2015 and foreign reserves as of theend of Sept. 2015 (data from IFS).

For instance, Hong Kong’s 87.8% reliance on exports to China (2014
data) is the highest in contrast to India’s 0.6%, which is the lowest (2014
data). In contrast to the large number of countries with increasing
reliance since 2000, such as South Korea (3.3 => 6.9 => 10.3), Malaysia(3.2 => 6.5 => 8.3), Singapore (5.6 => 15.5 => 16.7), and Taiwan (1.3 =>11.6 => 15.5), other countries like India, Indonesia, and the Philippines,
have declining their degrees of reliance as of 2014. Then, what sort ofrelation does this degree of reliance on exports to China have with therate of lost value in the exchange markets in 2015, when the Chinese
economic slowdown had become a threat to be feared? Figure 6 plots theImports/
foreign reserves(No. of months)

25.6
8.0
10.3
8.3
22.5
10.0
6.3
12.9
10.2
9.4
5.1
22.3

relation between these two dimensions for each country. Considering
this representation, we can see that the currencies of countries having
relatively low dependence on exports to China (India, Japan, thePhilippines) were devalued less and even countries with highdependence on exports to China, such as Hong Kong (not represented in
Figure 6), Singapore, and Taiwan, had little observable devaluation.
This phenomenon is a result of Hong Kong’s adoption of the Currency
Board system (dollar-peg), Singapore’s highly creditworthy central bankpolicies (the Monetary Authority of Singapore, or MAS) and its ample
10.2 months’ worth of exports held in foreign reserves as of September
2015, and Taiwan’s holdings of 22.3 months’ worth of exports in foreignexchange reserves.
Figure 6. Dependence on Exports to China vs. Exchange Devaluation Rate

25.0

Rate of Exchange Rate Devaluation(Jan/1/2015 - Dec/31/2015)

Malaysia
20.0

15.0
Indonesia
10.0

ThailandSingapore

South Korea
India

5.0

Philippines

VietnamTaiwan

Japan

0.0
0.0

5.0

10.0

15.0

Exports to China vs. Nominal GDP (%)
Data source: Calculated by author based on IFS, DOTS (IMF) data

20.0

Figure 7. Fuel Exports Ratio vs. Exchange Rate Devaluation Ratio

25.0
Currency exchange devalauation rate
(Jan/1/2015 - Dec/31/2015)

Malaysia
20.0
15.0
Indonesia

10.0

ThailandSouth Korea
Philippines
Vietnam

5.0

Japan
0.0
0.0

Singapore
India

Hong Kong
5.0

10.0

15.0

20.0

25.0

30.0

35.0

-5.0
Ratio of Fuel Exports to Total Exports (%)
Data source: Fuel export ratio data from World Bank, exchange devaluation data
calculated by author from Datastream data

・Steep Decline in Crude Oil Prices
The next disruptive factor manifesting in global financial markets in2015 is the fall in resource prices, such as for crude oil. The fall innatural resource prices worsened the fiscal situation for countries who
rely their exports on natural resources, such as Indonesia and Malaysia,
sending them into a vicious cycle where their currencies were weakened.
On considering Table 2, we can divide countries by their ratio of fuelexports to total exports, between countries at or above 20%, such as
Indonesia, Malaysia, and India, and those below 5%, such as Hong Kong,Japan, and the Philippines. Furthermore, if we observe the x–y plot of
how this relates to devaluation rates in the exchange markets in 2015
(Fig. 7), we see that the higher the relative fuel export ratio, the greater
the devaluation in currency exchange markets over the span of 2015.
The Malaysian ringgit had the greatest devaluation rate in 2015
because Malaysia had both strong dependence on China’s economy and ahigh fuel export ratio, compounded by only holding 6.3 months’ worth offoreign reserves, an amount not particularly large compared with other
Asian countries (Malaysia’s foreign reserves were at their peak in May
2013, falling more than 30% by the end of 2015; this is ostensibly due tolarge-scale currency intervention intended to soften the ringgit’s
devaluation). In contrast, reliance on the Chinese economy was low andforeign exchange reserves were sufficient for the Indian rupee and thePhilippine peso, which were thereby comparatively spared devaluation;these countries also enjoyed strong real economic growth. The above
examples suggest that the crucial surveillance method in the future will
involve combining economic phenomenon serving disruptive factors ininternational financial markets with country-specific macro data forpredicting the degree of ripple effects on each country’s capital flow,
exchange rates, and so on.

3. The Issues of Asian Regional Financial Cooperation
In protecting against the onset of another financial/currency crisis,
Asian countries are presently part of bilateral currency swap
agreements under the Chiang Mai Initiative (CMI); they are
simultaneously building up foreign reserves, developing a regional
financial safety net, and preparing themselves for crisis. The following
will provide observations on the current state of bolstering the CMI and
the issues facing it after the global financial crisis, as well as Japan’srole in Asian financial cooperation.
3.1 The Chiang Mai Initiative and its Recent Progress
In May 2000, minister-level talks were conducted in Chiang Mai,
Thailand, between financial officials of thirteen countries (ASEAN+3),
including the 10 ASEAN countries plus Japan, China, and South Korea;
these talks were intended “to build a support system between eachcountry through mutual financial agreements.” To that end, thesecountries reached an agreement on the CMI. As a collective financial
support system, this framework seeks to maintain stability of currency
and financial markets and supplement existing international funds
support systems, such as IMF.
In its initial days, the CMI did not have a centralized decision-making
or monitoring organization, but it gradually created a network ofbilateral swap agreements (BSAs) with its total funds being worth forty
billion US dollars. This system was then strengthened in various areas
to reflect changes in the state of international finance after the global
financial crisis. In particular, the new agreements made includedexpanding the scale of available funding (from 120 billion to 240 billion
dollars), five new ASEAN members joining the network,
multi-lateralizing (CMIM) the decision-making and payout processes,
establishing a monitoring institution, and introducing new
precautionary lines.
In July 2015, revised CMIM contracts were issued, featuring functional
improvements, such as a doubling of the total CMIM scale (from 120 to240 billion dollars), introduction of crisis prevention functions, and anincrease in the IMF delinked portion (the maximum percentage of total
withdrawable funds that can be mobilized without using an IMF
program) from 20% to 30%. These changes are expected to strengthen
this regional financial safety net by allowing it to deal with latent or
actual difficulties in capital accounts and short-term liquidity. The
revisions comprise the following two major points: first, expanding boththe funding scale and the IMF delinked portion as well as extending thefunding supply maturities and maximum support periods for the CMIM
Stability Facility (CMIM-SF), a crisis response mechanism; second,
introducing the CMIM Precautionary Line (CMIM-PL), which serves acrisis prevention function. Whereas the CMIM-SF continues to requirethat countries in crisis enter into talks with the IMF, regardless of any
conditional terms to receive international balance of payments support,
the CMIM-PL allows for funding provisions based on ex-anteconditionality (monitoring) without rigorous ex-post conditions.
To achieve delinking from the IMF, the ASEAN+3 monetary authorities
must construct a decision-making structure that activates the currency
swap agreements through independent judgment rather than relying on
the IMF rule. One specific policy to that end is the establishment of amutual monitoring system, whereby countries monitor each other’s
economic status (regional surveillance). At present, finance ministers
from the ASEAN+3 countries meet in May every year to discuss eachcountry’s economic situation, with participants from the countries’
central banks also meeting twice yearly to discuss policy. Coinciding
with the agreement to multi-lateralize was the agreement to establish
theASEAN+3 Macroeconomic Research Office (AMRO), an independent
monitoring institution that was established in Singapore in April 2011.
Along with conducting economic surveillance in the ASEAN+3 regions,
AMRO also supports CMIM execution.
Among Asian countries, there are countries that have BSAs in placewith China beyond the CMIM, combining this with foreign reserves held

in preparation as responses to an impending crisis. Kamio (2012)
calculates that the scale of the Asian financial safety net, including the
aforementioned foreign reserves, is sufficient to handle a crisis whencomparing the amounts of capital outflow that occurred in the Asiancurrency crisis and the collapse of Lehman brothers. However, as
already mentioned, the undertone of Asian currencies since 2015 has
initiated reductions in foreign reserves; if capital outflows were to gain
serious traction due to the Fed rate hike, it would be challenging to statethat this net is rock-solid in terms of crisis response. There has been no
CMIM activation as yet, but it is possible that there will be a time when
it will be necessary to activate the newly introduced CMIM-PL, whichallows for preventative funding supply before the occurrence of a crisis.
In such an event, it may well be crucial to clarify the process of smoothly
activating funds and establishing a group-based decision-making
mechanism in short order.
3.2 Japan’s Role in Asian Regional Financial Cooperation
The double mismatch phenomenon observed before the 1997 Asianfinancial crisis was one factor responsible for the dual overdependence
on the dollar in both investment and trade. Ogawa and Shimizu (2005)
suggested that rather than evaluating Asian currencies in comparison
with the dollar, it is necessary to compare them with their regional peers
to understand the movements of those currencies within Asia; therefore,
they proposed a currency basket comprising Asian currencies, called the
Asian Monetary Unit (AMU, see http:// www.rieti.go.jp/users/amu/index.html ).
Each Asian currency’s movement against this basket would be published
as an AMU deviation indicator (DI), keeping the index within a certain
band in an attempt to maintain stability within Asian currencies.
However, in the mid-2000s when the AMU DI was initially proposed, itwould still be some time before China relaxed its capital regulations;
therefore, it was predicted that it would likely be at least 10 years before
the RMB became an international currency—Ogawa and Shimizu (2005)
thought that the Japanese yen may play a stabilizing role for other
Asian currencies as the only hard currency in the basket.
However, as mentioned above, the RMB sees lively trading in global
offshore markets and the expectation of RMB exchange rate majorly
influences capital flow in Asia and movement of Asian currencies.
Coincidentally, the China Foreign Exchange Trade System (CFETS), runby the People’s Bank of China, announced the CFETS RMB Index inDecember 2015, which is a new RMB-based index of a currency basket
comprising thirteen currencies. In future, China will increase the RMB’s
flexibility while adopting a managed float system with reference to thecurrency basket. Until now, the RMB has been quasi-pegged to the US
dollar, resulting in significant linkage between other Asian currencies,
which were themselves pegged to the RMB, and the US dollar; however,
future RMB’s shift to a currency basket system is expected to result inan Asia-wide shift to exchange policies that take advantage of the BBC(basket–band-crawling) rule, initially proposed by Williamson (2000).
The Chinese RMB, a new Special Drawing Rights (SDR) basket member,moves asymmetrically to the Japanese yen as either an investment
currency or a safe-haven asset in times of risk-on/risk-off; however, as
each demonstrates its particular strengths and engages in mutual
cooperation with the other, this could lead to an era that explores
intra-regional exchange cooperation policies that could stabilize Asiancurrencies as a whole.
Further, as part of the ASEAN Economic Community (AEC), whichbegan in late 2015, initiatives toward the banking sector’sliberalization/integration (relaxation/harmonization of policies in eachcountry) are being planned/executed in the interest of ASEAN financial
integration. Owing to the diversity of economic development levels andindustry structures between ASEAN countries, their financial sectors
are also not uniform; however, they do share their presence in a region
where indirect finance is critical. Though the fundamental policy in
ASEAN financial integration is to target integrating ASEAN-wide
financial capital markets through harmonizing regulations and pushingderegulation of domestic financial services and capital transactions, themajor issue is improving infrastructure, such as financial regulatory
systems. An observation of the per-region trends for foreign
branches/offices of Japanese banks reveals that Asian branches
accounted for more than 50% of total foreign branches by the end of
FY2014; Asia is the core market for Japanese banks’ overseas business .
In the future, Japanese financial institutions are expected to play asignificant role in supporting the construction of a financial
infrastructure in Asia, providing high-quality financial services, andmaintaining the region’s financial safety net.

References[1]Calvo, Guillermo A., Leonardo Leideman and Carmen M. Reinhart （ 1993）“Capital Inflows and Real Exchange Rate Appreciation in Latin America; theRole of External Factors.” IMF Working Paper no. 14-69.
[2]Fernandez-Arias, Eduardo (1996) “The New Wave of Private Capital Inflows:
Push or Pull?” Journal of Development Economics 48, No.2: 389-418.
[3]Koepke, Robin (2015) “What Drives Capital Flows to Emerging Markets? A
Survey of the Empirical Literature” IIF Working Paper, April 23, 2015.
[4]Milesi-Ferretti, Gian-Maria, and Cedric Tille (2011) “The Great Retrenchment:International Capital Flows during the Global Financial Crisis.” Economic
Policy 26, no. 66: 289-346.
[5]Ogawa, Eiji and Junko Shimizu, (2005) “A Deviation Measurement for
Coordinated Exchange Rate Policies in East Asia,” RIETI Discussion Paper
Series 05-E-017.
[6]Williamson, John, (2000) Exchange Rate Regimes for East Asia: Reviving theIntermediate Option, Institute for International Economics, Washington, DC.
[7]Kamio, Atsushi, (2012) “Asian Financial Safety Nets for Enhanced Crisis
Systems: Economies that Expand Response Capability to External Shocks Leadto Enhanced Crisis Systems,” Daiwa Institute of Research（ http://www.dir.co.jp/souken/research/report/capital-mkt/12101201capital-mkt.pdf ）[Profile: Junko Shimizu]
Graduated from Hitotsubashi University’s Faculty of Economics in 1982. After
working at the Chase Manhattan Bank, Industrial Bank of Japan, Bank ofAmerica International, and others, joined Hitotsubashi University’s Graduate
School of Commerce and Management in April 1999. Earned a Ph.D. in commercein March 2004.
Specializes in international finance and exchange systems.
Major Works/Publications“On Intra-Asian Capital Flow and Selection of Trade Quotation Currencies”(Chapter 6) “Research on the International Flow of Money: Structural Issues that
Begat the Global Financial Crisis” ed. Keimei Kaizuka/ Policy Research Institute,
Ministry of Finance, Chuo Keizai (2012.11)“Exchange Rate Exposure and Exchange Rate Risk Management: The case ofJapanese exporting firms,” 2015, NBER Working Paper 21040, (with T. Ito, S.
Koibuchi, and K. Sato)i