Japan capital outflows going to US, Europe: Kuroda

Capital outflows from Japan since its central bank announced dramatic monetary easing measures a month ago appear to be mainly headed towards advanced economies, recently installed Governor Haruhiko Kuroda told Emerging Markets.

The effects of capital flows to emerging markets due to rich countries’ quantitative easing measures have been the main theme of discussions among delegates at the Asian Development Bank’s (ADB) meeting this year.

“Of course, eventually there will be some capital outflow to emerging economies, but at this stage there is no evidence of that,” Kuroda said in an exclusive interview.

He spoke as a new round of monetary easing in the US and in Europe coming in the wake of Japan’s 130 trillion yen measures, appeared set to increase already heavy volumes of liquidity heading for Asian and other emerging economy asset markets.

“We adopted the new monetary policy framework just one month ago, so at this stage we have no statistics showing capital inflow or outflow,” Kuroda said. “But there is some anecdotal evidence showing that there has probably been some capital outflow to developed countries, like the US, Europe, Australia and others.”

Analysts say this reflects a search for yield in major markets by Japanese investors. Concerns have been expressed that a “tsunami” of liquidity could flow into Asia rather than into advanced economies where financial markets are large enough to absorb it relatively easily. Such heavy flows could inflate stock and property prices, creating asset bubbles, and also driving up regional exchange rates.

“At this stage there appear to be no serious problems, “said Kuroda. He pointed out that there were many types of capital flow. Foreign direct investment (FDI) “would be quite useful for many emerging economies, and also bank loans which will be quite crucial for making infrastructure investments”.

Flows can also be in the form of portfolio capital “which are sometimes good and sometimes not so good,” he said. “Countries in the [Asia] region, particularly Japan, will certainly monitor capital flows within the region carefully.” 

IMF Asia Pacific Department head Anoop Singh told Emerging Markets there was “no sign yet of any significant [capital] outflows” from Japan since the Bank of Japan launched its mega monetary easing, although he too said this was based on anecdotal rather than official evidence.

There appeared to have been “inflows” into Japan, he noted. Analysts say this probably reflects repatriation of overseas funds by Japanese investors anxious to lock in gains on conversion of foreign currencies into yen.

China’s vice finance minister Zhu Guangyao said after a meeting of ASEAN+3 finance ministers and central bank governors that few concerns had been expressed at the meeting about the possible impact of Japanese capital flows on regional exchange rates.

While defending the BoJ’s aggressive monetary actions since he quit the role of ADB president, Kuroda urged the Japanese government of Prime Minister Shinzo Abe to follow up with structural reform.

“Structural reforms are absolutely necessary for raising Japan’s medium-term growth potential,” he said. “Monetary policy in any country may be able to maintain price stability in terms of, say, a two per cent or so inflation target, but structural reforms are necessary to raise the growth potential of any country.

“I am quite sure that the government of Japan is determined to make necessary structural reforms by way of the so-called Growth Strategy [due to be unveiled in June] and I hope that the Japanese government would implement these reforms. The effect may take time but the government would be well advised to implement them sooner rather than later.”

Kuroda added he was not worried that the short-term impact of monetary easing in Japan could fade before the impact of longer-term structural reforms kicks in, as some analysts have suggested.

The economic initiatives in Japan had “raised expectations”, he said. “If the market is convinced that the government is making the necessary structural reforms, then the market will accept that.”

“The most important thing is that the government should design the most appropriate growth strategy and implement it step by step,” he said. “Real results may take time but even so I think that the impact on the economy will be quite significant because of expectations of the likely increase of potential growth.”

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