To say the Bank of Japan (BOJ) brought out the bazooka when it began to implement its massive stimulus program is an understatement. This boost is being felt around Asia and should provide a buffer against the U.S. Federal Reserve's (Fed) impending end to quantitative easing and its monetary tightening.
Inflation is not anywhere near the BOJ target so we expect the bank to keep policy ultra-loose for some time. This means the region and Pacific Rim should benefit from Japan's capital. In April 2013, the BOJ undertook a massive and extremely aggressive easing program to jolt their economy out of two decades of deflation and stagnant growth. They have been injecting $60 to $80 billion a month into their financial system by purchasing Japanese Government Bonds (JGB). As the U.S. now goes in the opposite direction, the availability of cheap capital from Japan will become even more important.
The Fed has been scaling back its asset purchases over the last year and is now only making $35 billion a month in debt and mortgage-backed purchases. This is down from its peak of $85 billion per month. They expect to end its QE this year by October and raise interest rates, possibly by second quarter of 2015. This is increasing concerns there will be a liquidity drought throughout the Asian region where the Fed's aggressive easing has made the dollar easily available for funding. This, in turn, has caused liquidity outflows from overseas investors.
Thankfully, many Asian countries have shored up their defenses over the last several fiscal quarters. They have been rebuilding their Forex reserves and implementing cautious monetary policy when they could. The liquidity the BOJ will provide will be another buffer to help ease against the next step of the Fed's monetary tightening. Japan's story is positive for the region, and do not expect them to tighten for the next two years. This is Asia's new source of liquidity.
We are seeing evidence of spending spill over in the region. Japan's commercial bank lending to Asia is now at an all-time high. It is up from $364 billion, seen in 2012, to its current record of $450 billion. This comes on the heels of regional banks looking to overseas sources for better returns. Japan's banks have an excess of cash and are becoming more active around Asia. We are see a particular pickup in ASEAN. Since rates are higher in their financial markets, they are looking for cheap cash elsewhere and this arbitrage works very well for lenders. Thanks to the BOJ excess reserves ballooning to roughly twelve percent of their assets, cash is cheap there. This ratio is forecasted to touch near 16 percent by the end of this year. We have also seen Japan's foreign direct investment into regional economies has been increasing steadily. This outward investment is now at a record high of $38.7 billion. Their share of direct investment stock now equals the U.S. holdings and well exceeds the European Union.
In the region, according to the BOJ, the manufacturing sector has received the most of Japan's direct investments. Now, we are seeing non-manufacturing investment pick up. Countries like India, Indonesia and Vietnam are seeing an increase of capital (Foreign Direct Investment) inflows from Japan
This means Japanese companies are increasing their presence in the service sector as well. It is no longer limited to the manufacturing industry. Firms no longer just view Asia as a production-based environment but as a growing consumer market as well.
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