to japan and other asian economies, there are growing signs that integration of securities markets is steadily taking place between japan and emerging asia. in particular, their stock markets have shown increasingly greater integration since the early 2000s. this may be associated with the establishment of region - wide production and trade networks in asia. japan has been exerting a strong influence on other asian stock markets. in recent years, the influence of china on stock markets in this region has increased. and this is consistent with the growing importance of china in the post - crisis period. 7 the greater synchronization in asia suggests that stock markets are more prone to common shocks, rather than country - specific shocks, and therefore investors may benefit less from diversifying their portfolios across the asian region. at the same time, however, greater cooperation in macroeconomic policies and financial infrastructure may contribute to stabilizing stock markets, and thus encourage their further development ( chart 14 ). there is also a high degree of synchronization in the bond markets of japan, the united states, and europe ( chart 15 ). however, it is likely that with further development of bond markets, financial integration will deepen in the asian region in the near future ( chart 16 ). one contributing factor to an increase in capital inflows to bond markets in emerging asia is interest rate differentials between emerging and advanced economies. since interest rates are generally higher in the former than in the latter, global investors tend to engage in carry trade investment – investment in search of higher yields without hedging foreign exchange risk, which is thus highly speculative – in periods of high appetite for risk. therefore, it should be noted that capital flows to emerging economies tend to become highly volatile, as do their bond prices. d. increasing cross - border banking activities between japan and emerging asia finally, i would like to consider cross - border banking activities. as mentioned earlier, the financial system in emerging asia has traditionally been characterized as bank - dominant. in this region, foreign - owned financial institutions are prominent in the fields of long - term finance, such as project finance, and trade credit, some of whose services require sophisticated skills and experiences. with the worsening of the european sovereign debt problem, some financial institutions in europe have begun to withdraw from those fields. in the case of japan, overseas lending activities by japanese - owned financial institutions began to decline sharply in the 1990s, mainly as a result of nonperforming - loan problems. in recent years

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