October 10, 2019
Bank of Japan
Development of Asia's Capital Markets:
Roles and Challenges
Keynote Speech at the ASIFMA Annual Conference 2019
Masayoshi Amamiya
Deputy Governor of the Bank of Japan
Introduction
Good morning everyone. It is my great pleasure to be here at the Asia Securities Industry
and Financial Markets Association (ASIFMA) annual conference 2019. I am honored to
address this distinguished audience comprised of representatives from the securities and
asset management industries, institutional investors, policy makers, and regulators in Asia
and other important regions.
Asia's capital markets have experienced remarkable growth since the Asian financial crisis
in the late 1990s. Asia's share of global stock market capitalization1 soared from 1 percent
in 2000 to 15 percent in 2017. Notably, the amount outstanding in local currency bond
markets in Asia as a share of GDP2 in 2018 increased to more than double that in 2000
(Chart 1). Obviously, the rapid expansion of Asian economies has driven the growth of the
capital markets in the region. At the same time, the collective efforts of market participants,
policy makers, and regulators both at national and regional levels have contributed to
market liberalization and enhancement of market infrastructures in Asia.
Typical examples of such regional cooperation include the Asian Bond Markets Initiative
(ABMI), launched by the ASEAN+3, as well as the Asian Bond Fund (ABF) initiative3 of
the Executives' Meeting of East Central Banks (EMEAP), which is a group of
Asia-Pacific
11 central banks and monetary authorities in the region. Financial industry associations,
such as the ASIFMA, have also played a vital role by facilitating dialogue between market
participants, promoting regional coordination, and providing necessary recommendations
1
Based on figures for "East Asia & Pacific" (a country and region grouping employed in the World
Bank's World Development Indicators) excluding high-income countries and regions (Australia,
Hong Kong, Japan, South Korea, New Zealand, and Singapore).
2
Based on the aggregated amount outstanding in local currency bond markets in China, Hong Kong,
India, South Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.
3
The Asian Bond Fund (ABF), established in 2003, is an index bond fund with a two-phase
framework, namely, "ABF1," which invested in U.S. dollar bonds, and "ABF2," which invests in
local currency bonds and is open to private sector investors. In 2016, because the EMEAP
determined that ABF1 had achieved its original purpose, its proceeds were reinvested in ABF2. In
July 2018, some selected bonds held within ABF2 were made available for lending to support the
development of local currency securities lending markets and to enhance the functioning of regional
money markets.
from a market perspective. Activities by those market participants and relevant authorities
have been indispensable for the development of Asia's capital markets. I would like to
recognize and praise all of those who have committed to these efforts.
Looking to the future, Asia needs to further accelerate and deepen the development of its
financial markets more than ever before. This is because the existence of more developed
capital markets both domestically and regionally will play a much more crucial role for the
stable economic growth of the region.
long-term
Today, I would like to discuss the economic implications of the conference theme,
"developing Asia's capital markets," from several perspectives. Then, I will briefly touch on
interest rate benchmark reform, as a specific example of the challenges we are facing as we
endeavor to further develop market infrastructures.
Economic Significance of Further Developments in Asia's Capital Markets
Financing Economic Growth through the Growing Class
Middle-Income
Let me begin with the importance of relying on the growing class to finance
middle-income
economic growth. The class in Asia has been growing to a remarkable
middle-income
extent. The Organisation for Economic and Development (OECD) forecasts4
Co-operation
that the population in Asia will constitute 66 percent of the world's share in
middle-income
2030, more than doubling that in 2009 (Chart 2).
The rise of Asia's class will be accompanied by growth and diversification
middle-income
of the financial needs of that class. Both domestic and regional markets in Asia must satisfy
those evolving demands by providing various financial services, including investment trusts,
pension funds, and insurance.
By doing so, Asia will receive benefits such as inflows of money from the
middle-income
class into infrastructure projects, which require a significant amount of funding. In other
words, meeting the financial demands of the growing class will contribute to
middle-income
utilization of Asian savings for Asian investments.
Strengthening Financial Stability with More Liquid Domestic Capital Markets
Now, I would like to proceed to a perspective of financial stability. Since the Asian financial
crisis, many countries in the region have made efforts, including a reduction
wide-ranging
in the loans held by banks, in order to enhance their resilience against
non-performing
capital flow dynamics.
However, the presence of domestic bond markets in the Asian financial system is still
limited, compared with that of banking sectors. In order to further strengthen financial
stability in Asia, it is important to diversify funding sources for firms by developing
domestic bond markets.5 Recent empirical studies6 point out that domestic bond markets in
East Asia provided an alternative source of funding for firms in the region when the
liquidity of international debt markets vanished during the global financial crisis from 2008
to 2009. East Asia saw greater domestic bond issuance during the crisis, in contrast with
lower international bond issuance and a reduction in the amount of syndicated loan
origination (Chart 3). This result tells us how important it is to develop domestic bond
markets to make the Asian financial system more robust.
Enhancing the Effectiveness of Monetary Policy
Lastly, I will touch on the effectiveness of monetary policy. For the conduct of monetary
policy, central banks buy and sell financial instruments from capital markets, and they also
receive financial instruments as collateral for the provision of liquidity. So, the degree of
market functioning and liquidity concerning those financial instruments is a critical element
that impacts the effectiveness of monetary policy.
In this regard, repos are financial instruments that are frequently used in the conduct of
monetary policy, because repos carry a low credit risk and they are suitable for inventory
and liquidity management by market makers. In Asia, market participants have preferred to
use FX swaps and uncollateralized funding because of their accessibility and operational
convenience, and the role of repo markets has been relatively limited overall. However, the
situation is now changing. The EMEAP market survey7 suggests ongoing efforts to enhance
the functioning and liquidity of money markets such as repos. These efforts are being driven
by various initiatives, such as the promotion of participation and the enhancement
non-bank
of industry standards. Accelerating these efforts would lead to greater effectiveness of
monetary policy in Asia.
Interest Rate Benchmark Reform
Before closing, I will comment on interest rate benchmark reform. It would be beneficial to
share some key points of interest related to this issue, as there are active discussions in
various markets throughout the world.
In the wake of the LIBOR manipulation scandal, more reliable and robust interest rate
benchmarks have been pursued. In addition, LIBOR will most likely be permanently
discontinued after the end of 2021 judging from the announcement by the U.K. Financial
Conduct Authority in July 2017 that the survival of LIBOR cannot be guaranteed.
LIBOR is the most benchmark in the global financial system and its
widely-used
discontinuation would have a significant impact on Asian markets. For example, the
transition from U.S. dollar LIBOR to an alternative rate would be necessary in
risk-free
cases where the U.S. dollar is funded via swaps. Accordingly, the other leg
cross-currency
of the swap could also be affected.
We should also bear in mind that the discontinuation would affect a wide range of market
participants in Asia. The latest EMEAP report8 on a survey among member central banks
on this issue stresses the importance of raising awareness of the potential discontinuation of
LIBOR among institutional investors and corporates in particular.
non-financial
In Japan, initiatives to prepare for the possible discontinuation of Japanese yen LIBOR have
been taken by the Committee on Japanese Yen Interest Rate Benchmarks.
Cross-Industry
The Bank of Japan serves as Secretariat on the committee, which is composed of a wide
range of parties including financial institutions, institutional investors, and
non-financial
corporates. The committee has also expanded its deliberations into a public consultation and
a wide range of outreach activities, such as holding a forum for corporates and
non-financial
industry associations (Chart 4). As a result, market awareness has been gradually growing
and proactive initiatives towards interest rate benchmark reform, such as LIBOR exposure
mapping, have been launched.
The permanent discontinuation of LIBOR would be one of the most significant events in
global financial history, and the deadline is unavoidable. It is therefore important for us all
to work together for our common interest a smooth transition to alternative reference
--
rates. We should bring together our wisdom and experience towards
cross-sectorial
establishing more reliable and robust interest rate benchmarks, and make interest rate
benchmark reform one of the great successes in global financial history.
Concluding Remarks
This conference covers so many important topics related to financial developments in Asia.
I hope that lively discussions and exchanges of viewpoints over the coming two days will
further contribute to the development of Asia's capital markets.
Thank you very much for your attention.
Development of Asia's Capital Markets:
Roles and Challenges
Keynote Speech at the ASIFMA Annual Conference 2019
October 10, 2019
Masayoshi Amamiya
Chart 1
Asia's Capital Markets
Amount Outstanding of Local Currency
Share of Global Stock Market
Bond Markets as a Share of GDP
Capitalization
%
100
2017
2000
90
80
1%
15%
70
60
50
40
99%
85%
30
20
10
East Asia & Pacific (excluding High Income) Rest of the World
0
2000 2018
Notes: 1. In the left-hand chart, "East Asia & Pacific (excluding High Income)" covers the "East Asia & Pacific" (a country and region grouping employed
in the World Bank's World Development Indicators) excluding high-income countries and regions (Australia, Hong Kong, Japan, South Korea,
New Zealand, and Singapore).
2. In the right-hand chart, the figures are based on the aggregated amount outstanding of local currency bond markets in China, Hong Kong, India,
South Korea, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.
1
Sources: Asian Bond Online; World Bank, "World Development Indicators."
Chart 2
Share of the World's Middle-Income Class
2009 2030 (Projection)
28%
34%
66%
72%
Asia Rest of the World
Chart 3
Issuance Activity in East Asia during the Global Financial Crisis
%
%
100 500
80 400
volume
volume
60 300
issuance
issuance
in
in
40 200
changes
changes
20 100
Percent
Percent
0 0
-20 -100
2006-2007 2008-2009 2010-2011
Domestic Bonds (lhs) Domestic Syndicated Loans (lhs)
International Bonds (rhs) International Syndicated Loans (rhs)
Note: Percent changes in aggregated total issuance volume of domestic and international bonds, and domestic and international syndicated loans in each sub-
period. The figures are calculated by referencing Abraham, F., J. J. Cortina, and S. L. Schmukler (2019), "The Rise of Domestic Capital Markets for
Corporate Financing: Lessons from East Asia," World Bank Group Policy Research Working Paper, No. 8844. The top and bottom 10 percentile of the
sample has been excluded in the aggregation of data for each sub-period.
3
Source: Dealogic.
Interest Rate Benchmark Reform
•
Raising awareness is the key to success.
•
In Japan, the Cross-Industry Committee on Japanese Yen Interest Rate
Benchmarks held the Interest Rate Benchmark Reform Forum on
August 1, 2019.
http://www.boj.or.jp/en/announcements/release_2019/rel190830f.htm/
Participated widely by:
- Financial Institutions
- Non-financial Corporates (e.g.,
TOYOTA)
- Institutional Investors (e.g.,
Insurance Companies)
- Relevant Industrial Groups
Photo: Shoichi Nose