November 28, 2017
Bank of Japan
Asian Financial Markets 20 Years since the Asian
--
Financial Crisis, and Prospects for the Next 20 Years
--
Keynote Speech at 2017 Annual General Meeting of Asia
Securities Forum in Tokyo
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction: The Past 20 Years
Good morning ladies and gentlemen. It is my great pleasure to join you this morning at the
Annual General Meeting of Asia Securities Forum.
The year 2017 marks twenty years since the Asian Financial Crisis. Before the crisis, the
region was highly praised for its strong economic growth. But at the same time, weaknesses
had been accumulating, such as large current account deficits, high external debt, and
massive non-performing loans. When a combination of economic, financial, and corporate
problems triggered a sharp loss of confidence and capital outflows from the region, the crisis
erupted and countries faced extreme recessions.
Twenty years later, Asia is now the largest contributor to global growth, accounting for 57
percent of global growth in real terms for 2016.1 Domestic demand, especially consumption,
has become the engine of growth and major cities in the region have prospered, being often
characterized by the simple phrase, "lively and vibrant." Here in Tokyo, the surging number
of Asian tourists to Japan is itself evidence for the strength of growing consumption in Asia.
I cannot but think of the significant changes that the economies of Asia, including Japan, have
experienced over the past twenty years. These changes have been made possible through
countless painstaking efforts, initiatives, and policies that countries in the region have
introduced, both individually and collectively. I myself have been at the forefront of policy
making in orchestrating crisis responses and enhancing regional cooperation in Asia for
almost two decades, at Japan's Ministry of Finance, the Asian Development Bank (ADB), and
the Bank of Japan (BOJ). Confirmation of the region's greater resilience against a major
economic shock is deeply reassuring.
Let me touch upon the responses taken in the region after the crisis two decades ago. First,
Asian countries improved their current account balances and strengthened foreign exchange
reserves. The increase in net external assets has enhanced resilience against possible capital
outflows. Second, the ratio of non-performing loans has decreased, and regulatory and
supervisory frameworks have been strengthened. Third, many countries in the region have
adopted more flexible exchange systems. Last but not least, financial markets, especially
local currency bond markets, have continued to develop.
The development of local currency bond markets was aimed at addressing two issues. One
was the so-called double mismatches, that is, currency mismatches and maturity mismatches,
and the other was a bank-centric financial system. Financial institutions in the region were
borrowing short-term debt in dollars to finance longer-term lending in domestic currencies.
This double mismatch was particularly damaging as the significant depreciation of their
currencies inflated borrowers' debt burden. This led foreign lenders to refuse rolling
short-term debt, which then triggered massive defaults of banks and firms. Twenty years later,
the degree of the double mismatches has been reduced. Local currency bond markets have
grown, as can be seen in Chart 1, providing an alternative intermediation channel to
bank-financing. Today, the capitalization of Asian local bond markets is equivalent to 3.7
trillion U.S. dollars, more than 100 times larger than before the crisis.2 We have certainly
made progress. Economies have become more resilient to exogenous shocks, and the
financial sector has developed significantly.
In addition to these individual efforts, various initiatives have been established through
regional cooperation. For example, a regional financial safety net, the Chiang-Mai Initiative
Multilateralization, has been set up by the ASEAN countries, together with China, Japan, and
Korea, or ASEAN+3. The Asian Bond Market Initiative (ABMI) was launched in 2002 by
ASEAN+3, and this has contributed to the development of local currency bond markets.
Market associations and self-regulatory organizations, such as yourselves, have also played
an important part in enhancing the efficiency and transparency of the markets.
Challenges Remaining
However, important challenges still remain. Today, I will focus on the importance of further
developing local currency bond markets, partly because I am surrounded here by people from
the securities industry.
As I have mentioned, local currency bond markets have grown over the last twenty years. At
the same time, bank financing still dominates as a primary source of funding in the region.
You can see this from Chart 2. Bank credit, as a source of corporate funding, has outgrown
both stock market capitalization and corporate bonds outstanding over the years.
The strong reliance on may be explained by Asian corporate culture, which
bank-financing
puts high priority on business relationships. Bond financing is often not the first choice for
domestic firms when financing their business. To make my point clear, I am not proposing
that Asian corporates should rely on over as is the case in
market-financing bank-financing,
some other countries. I would rather like to stress the importance of diversifying the sources
of funding to reduce the direct effect on the corporate sector, should the banking sector face
economic or financial shocks.
Along with this cultural issue, domestic firms are deterred by the cost of
bond-financing
when compared with bank loans. One of the factors that explain the unattractiveness of
bond-financing may be the lower levels of market activity and less liquidity in the secondary
market. With lower liquidity in the secondary market, investors require additional premiums,
which increase the cost of issuance. In such an environment, domestic firms are more likely
to rely on banks for financing.
In this regard, developing highly efficient and liquid local currency bond markets is essential.
Past initiatives in the region have enriched the primary markets. We may therefore need to put
more focus on developing liquid secondary markets.
As presented in Chart 3, according to a survey conducted by Asian Bonds Online, there is no
single factor that inhibits the development of the secondary markets. Survey respondents
were asked how important each of the eight structural issues was, with respect to local
currency bond market liquidity. The survey results in recent three years show that "Greater
Diversity of Investor Profile" was the most important structural issue for promoting the
market liquidity. Another structural issue, "Transaction Funding," which also marked a
relatively high score, may also be worth noting as an important impediment.
Let me elaborate these two structural issues. First, the issue of investor base diversification.
Since banks are the dominant financial institutions in the region, they are often the largest
investor group as well. The presence of investors like mutual funds, and active
buy-and-trade
investors like hedge funds is relatively low, and this may be one of the causes of low liquidity
in the secondary market. But it has to be borne in mind that merely increasing the size of the
domestic investor base does not necessarily improve market functioning. In the region,
demand for local currency bonds exceeds supply. In this situation, if a few dominant
buy-and-hold type investors become even larger, they may take bonds out of circulation,
leaving fewer investable bonds in the market. It is therefore important to increase the variety
of investor types, attracting those who have different investment objectives and strategies.
The second issue is that of transaction financing. Improving it would require the development
of repo markets. Repo markets are a key instrument for banks to trade cash while controlling
counterparty risks. A repo market is also a precondition for feasible
well-functioning
by dealers, and would increase trading in both equity and bond
market-making two-way
markets. However, repo transactions in many Asian emerging markets are still restricted or
small in transaction volume, as uncollateralized funding conditions are easy and
short-term
many investors do not have the incentive to use such instruments.
I have discussed the importance of developing local currency bond markets from the
viewpoint of preparing for exogenous shocks and adverse circumstances. I would like to add
another perspective related to the main theme of this meeting, "Ways for building a
sustainable future."
It has often been said that, in order to achieve sustainable growth, the region must narrow its
large infrastructure gaps. The ADB estimates that this will require funding of over 1.7 trillion
U.S. dollars a year, through 2030.3 This magnitude of financing is well beyond the current
funding capabilities of individual national governments, international organizations, and
banks that operate as project finance lenders in the region.
In the financing of infrastructure assets, bond finance offers a number of advantages over
bank loan finance. Infrastructure assets often generate stable long-term cash flows that make
infrastructure debt an attractive investment opportunity for bond investors. Insurers and
pension funds who have liabilities are seeking to match them with
long-dated long-dated
assets. Bond markets are able to provide opportunities to issue longer-tenor debt at fixed
interest rates, thereby reducing the risks associated with refinancing shorter-tenor debt and
the necessity of having to enter into interest rate swaps to manage the risk of
long-term
interest rate fluctuation. Also, as revenues from most infrastructure projects are denominated
in local currencies, local currency infrastructure bonds will be able to mitigate the risk of
currency mismatch.
Central Banks' Initiatives
Let me now explain some measures taken by central banks in the region. Along with the
Ministries of Finance, central banks of ASEAN+3 are taking part in the ABMI that I
mentioned earlier, and have contributed especially to the discussion of payment
cross-border
and settlement issues.
Furthermore, the Executives' Meeting of East Asia Pacific (EMEAP) central banks, a group
of 11 central banks and monetary authorities in the East Asia and Pacific region, set up the
Asian Bond Fund (ABF) initiative in 2003, in order to develop local currency bond markets.
The region has seen several advancements since the launch of the ABF initiative. They
include (1) accelerated tax reforms to exempt nonresident investors from withholding tax, (2)
enhancement of the regulatory framework for exchange-traded funds, (3) liberalization of
foreign exchange administration rules, (4) improvements in regional market infrastructure,
and (5) the adoption of documentation in line with international best practices. These
advancements could perhaps have been achieved sooner or later without the ABF initiative,
but the initiative certainly had a positive effect in facilitating these developments.4
The EMEAP central banks have also been engaged in promoting analysis of financial market
developments in the region. In 2014, EMEAP published a report that assessed the
developments and challenges in the repo markets in the region.5 In addition to the benefits of
efficient repo markets that have been noted, repos are an essential instrument in the open
market operations of central banks, and therefore important to the transmission of monetary
policy. The deeper these markets are, the more scope they offer central banks in their liquidity
management operations.
Along with intra-regional initiatives, individual central banks have also introduced measures
aimed at facilitating repo transactions. For example, the Monetary Authority of Singapore
launched the Securities Repo Facility to promote their activities. The central
market-making
banks in Malaysia, Thailand, and Indonesia, have set up programs to increase awareness of
repo markets among market participants, including corporate treasuries. Many other central
banks are also working with investors, issuers, and intermediaries, to assess what can be done
to facilitate active repo markets.
We, at the BOJ, have been participating in discussions at EMEAP to enhance the ABF
initiative, and have been active in conducting market reviews. Assistant Governor Maeda of
the BOJ currently chairs the Working Group on Financial Markets, leading further work in
this area. The Bank also contributes to with other authorities.
capacity-building
Concluding Remarks: Initiatives for the Next 20 Years
I have discussed the importance of developing local currency bond markets, its remaining
challenges, and initiatives taken by central banks in the region. Let me now summarize some
of the wide range of benefits that can be gained by developing deep and liquid local currency
bond markets. First, it makes possible for governments and firms to borrow in local
currencies at longer maturities. This will reduce the risks associated with currency and
maturity mismatches. Second, the development of such bond markets will enable borrowers
to diversify their sources of funding by complementing bank-financing. At the same time,
investors will gain more investment opportunities. With enhanced investment opportunities,
abundant savings in the region could be recycled within the region. It could also fill part of
the large infrastructure funding gap. Lastly, primary and secondary bond
well-functioning
markets reinforced by an expanded investor base will improve the overall efficiency of
financial markets, which in turn will aid macro-economic policy implementation.
Over the past two decades, there have been many fruitful initiatives and programs to develop
local currency bond markets. However, this is still work in progress and more needs to be
done. As the market is a place of interaction, all stakeholders must play their roles. A
successful implementation strategy must identify critical paths and appropriate sequencing to
achieve the optimal result. Cooperation among authorities and private market participants is
the key to further development.
The ASEAN+3 Bond Market Forum (ABMF) was set up in September 2010 by the
ASEAN+3 countries as a common platform to foster standardization of market practices and
harmonization of regulations related to cross-border bond transactions in the region.
Members comprise experts drawn from both public and private sector organizations, such as
those present at this forum today. This type of forum is a practical step toward achieving the
ultimate common goal of Asia's bond market development.
The global economy continues to recover and the financial system has been maintaining
stability. As the IMF's Managing Director expressed in her Global Policy Agenda at the last
International Monetary and Financial Committee (IMFC) meeting, current economic and
financial conditions provide "a window of opportunity" to tackle key challenges.
Stakeholders in the region must maintain the will to further develop and deepen the market.
Through these concerted efforts, the challenges in fostering bond markets can be overcome.
On the 10th anniversary of the Asian Financial Crisis, at a BOJ symposium, the then
Governor Zeti of Bank Negara Malaysia, stated: Asia, especially the ASEAN tigers, is back
and poised to leap on to the next wave of economic advancement and prosperity.6 How
correct she was. Asia's economy has developed much more vigorously than many had
anticipated. Economic integration in the region has further deepened through the
development of global value chains.
Looking ahead to the next twenty years, Asia's economy will continue to be at the core of
world economic growth and we will experience further integration. Along with such
developments, it is natural to seek more developed and integrated regional financial markets.
We can anticipate that twenty years from now, Asia's financial markets will have developed
to become as efficient and liquid as other major financial centers in the world.
Thank you for your kind attention.
Asian Financial Markets
-
20 Years since the Asian Financial Crisis,
-
and Prospects for the Next 20 Years
November 28, 2017
Haruhiko Kuroda
Governor of the Bank of Japan
Increased Resilience
Less reliance on
Growth of Asian local currency
bond markets
foreign-currencydenominated short-term funding
%
US$ trillion
70
12
Indonesia Malaysia
60
10
Philippines Thailand
Corporate
50
8
Government
40
6
30
4
20
2
10
0
0
95 97 99 01 03 05 07 09 11 13 15 17
95 98 01 04 07 10 13 16
CY CY
Notes : 1. The figures are the ratios of foreign currency-denominated Notes: 1. Aggregates of China, Hong Kong, Indonesia, Korea,
short-term claims to all claims of foreign banks. Malaysia, Philippines, Singapore, Thailand, and Vietnam.
2. The latest data are as of end-June 2017. 2. The figures for 2017 are as of end-June 2017.
Source: Asian Bonds Online.
Source: BIS.
Bank-Dominated Financial Systems
Corporate financing
Investor base
in Emerging Asia
in Emerging Asia
US$ trillion
140 % of GDP
4
Pension funds
Local currency bonds
120
Insurance
Stocks (market cap.) 3
Mutual funds
100
Bank credit
Deposit money banks
80
2
60
1
40
20
0
0
1996 2006 2016
Notes: 1. As of end-2013 except for India's deposit-money-banks figure which
Note: Emerging Asia is the aggregate of China, India, Indonesia,
refers to end-March 2014.
Korea, Malaysia, Philippines, Thailand, and Vietnam.
Sources: Asian Bonds Online; The World Bank, World Development Indicators. 2. Figures for Pension funds and Mutual funds for Indonesia and Vietnam,
and Insurance for Hong Kong are not available.
Sources: The IMF, International Financial Statistics; National central banks;
The World Bank, Global Financial Development Database.
Structural Issues in Local Currency
Corporate Bond Markets in Emerging East Asia
Annual Bond Market Liquidity Survey
4
more
important 3.3
3.2
3.0
3.0
2.9
2.9
3
2.7
2.7
2
less
important
1
Greater Transparency Hedging Settlement Tax Transaction FX Market access
diversity of mechanisms & custody treatment funding regulations
i t fil