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The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian
Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI
does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology
used may not necessarily be consistent with ADB official terms.
Dec 2016
Government bond yields increasingly low
Japan: Asias frontrunner in ultra-low yields followed by Korea
JP SK JP SK
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2
2
Japanese portfolio investors have reacted to increasingly lower
rates by investing abroad, especially in debt securities
400 400
300 300
200 200
100 100
0 0
-100 -100
-200 -200
-300 -300
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
3
Long-term debt securities dominating inflows
400 400
350 350
300 300
250 250
200 200
150 150
100 100
50 50
0 0
-50 -50
-100 -100
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
*Long term debt securities refer to bonds and notes, while short-term are money market instruments
Positive implies outflows
4
4
US followed by EU countries favorite destinations of Japanese
portfolio outflows, not emerging Asia
Japan: Main destinations of outflows in 2016 Japan: Main destinations of outflows in 2016
(Long-term debt securities, in USD bn) (Short-term debt securities, in USD bn)
CAYMAN
GERMANY ISLANDS
ITALY BELGIUM THAILAND SINGAPORE
IRELAND
7
SWITZERLAND 3 9 8
4 3 SPAIN NETHERLANDS
26
4 2 4
AUSTRALIA U.S.A.
6 30
CANADA BELGIUM
12 30
AURALIA
LUXEMBORG 30
12
U.A.E.
U.S.A.
86 LUXEMBORG
FRANCE 121
28 436
5
Within Asia, dominated by Singapore. Hardly any flows to EM
Asia and not increasing with Japanese ultra-low rates
10
-10
SINGAPORE THAILAND TAIWAN INDONESIA INDIA PHILIPPINES MALAYSIA VIETNAM
6
No strong correlation found between Japanese portfolio
outflows into EM Asia and expected rate of return
Correlation between Japanese capital outflows and Correlation between Japanese capital outflow and
expected rate of return* exchange rate adjusted expected rate of return*
India 0.53 India
-0.04
Indonesia -0.71 Indonesia
-0.17
Malaysia 0.34
Malaysia
0.26
Philippines -0.03
Philippines
-0.37
Singapore 0.00
Singapore
Taiwan 0.57
0.68
Taiwan
Thailand -0.50 -0.48
Vietnam Thailand
0.16 0.02
* Expected rate of return is defined as the difference between * Expected rate of return is defined as the difference between 10Y
10Y sovereign bond yield of a host country against JGB yield sovereign bond yield of a host country against JGB yield plus the
Capital outflow is the amount of capital invested by Japanese expected appreciation of host countrys currency against yen.
banks in debt securities of targeted country Capital outflow is the amount of capital invested by Japanese banks in
Data since 2005 debt securities of targeted country
Data since 2005
Source: MoF, Bloomberg, Datastream, Natixis
7
Interest rate differential would have warranted more
Japanese outflows into EM Asia but
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
05 06 07 08 09 10 11 12 13 14 15 16
8
Not so much when taking into account exchange rate
expectations: Original sign type of problem?
Sum of rate differential (local - Japan) and expcted appreciation of FX of EM country against JPY (in %)
India Indoneisa Malaysia
10 10
5 5
0 0
-5 -5
-10 -10
05 06 07 08 09 10 11 12 13 14 15 16
10 10
5 5
0 0
-5 -5
-10 -10
05 06 07 08 09 10 11 12 13 14 15 16
Source: Datatream, Bloomberg, Natixis
9
9
Zooming into how different investors behave in an
ultra-low interest rate environment?
Focus on:
10
10
Japanese banks profits squeezed by narrowing margin of
domestic rates so need to move abroad to keep profitability
11
11
Aggressively increase in overseas assets although from very low base
12
12
Japanese banks cross border lending abroad quickly growing
but mainly into developed world
400 France
190
200
UK
0 295
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 Q1
13
13
Japanese banks cross border lending into EM Asia still small
but increasing, especially as Japanese rates get lower
Japanese banks' claims against EM countries Japanese banks' claims against EM Asia in 2016 Q2
(US$ bn) and 10Y yield of JGB (%) (US$ bn)
Philippines
30 Thailand Indonesia India 1.6 4
Malaysia
Malaysia Philippines JGB (%, rhs) Vietnam 7
1.4
25 7
India
1.2 17
20 1
0.8 Indonesia
15 19
0.6
10 0.4
0.2 Thailand
5 26
0 Singapore
0 -0.2 151
14
14
Even with very low domestic rates, Japanese banks expansion
abroad at risk due to USD funding constraints
15
15
As for Pension Funds: Japan (GPIF) ahead of Korea (NPS) in terms of
foreign assets but NPS expected to catch up by 2020
100%
6 10
12
90%
25
21 13
80% 20
4
70%
13 15 5
60% 20
20
50% 21 25
40%
30%
51
45
20% 39 35
10%
0%
Japan Korea Japan* Korea
Jun-16 Jun-16 Strategic allocation
(Korea: in 2020; Japan: Undefined)
* JP: Target undefined for alternative investment
Source: GPIF, company data, Natixis
16
16
Koreas NPS also keener to invest in EM (especially Asia)
Korea: Global Equities by Region in 2015 Japan: Global Equities by Region in 2015
17
17
Koreas also more exposed to alternative investment, especially overseas
NPS: Strategy in Alternatives (USD bn) NPS: Asset in Alternatives (2015, USD bn)
60 35
50 30
25
40
Others
20
30 Global Private Equity
15 Infrasturcture
20 Domestic 10 Real Estate
10 5
0 0
11 12 13 14 15 Domestic Global
18
18
NPS doing better in terms of risk-adjusted returns
and recently even in terms of total returns
19
Some takeaways for Japanese and Korean investors reaction to
low interest rates domestically
Japans front-running position in the ultra-low rate environment has not so far resulted
in a large portfolio outflow into higher yield economies in Emerging Asia
Portfolio outflows into relatively low interest rate environments (US followed by EU)
Same conclusion when looking at different types of Japanese investors (banks and
pension funds) and especially so when compared with Korean ones (pension funds)
Fast increase in Japanese banks investment overseas mainly into US and EU and not
EM Asia notwithstanding high carry trade opportunities in many instances
As for pension funds, even if Japans GPIF has been living with low rates for much
longer than Koreas NPS it has remained more conservative.
This is specially true when focusing on their investment in Emerging Asia
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