Toward the Effective Utilization of Yen Funds in Asia

No.82
May 2000
Research Fellow Hisashi Kajiyama

1. Since the mid-1980s, Japan has defended its position as having the largest savings surplus of any country in the world. The fundamental reflow pattern of this surplus, however, has focused consistently on European and American securities investments.
   
   On the other hand, secure capital investment from Japan to Asia has been limited exclusively to direct investment. Securities investment has been effectively zero, and there have been severe loan fluctuations.
2. This has been a result of (1) high growth in the European and American securities market, making it easy for Japanese investment, and (2) oppositely, the undeveloped and infant state of the Asian securities market-Japan included-coupled with the lack of an interface for Japanese securities investment in Asia.
3. Securities investment in Europe and the U.S. are exclusively in dollars and euros, meaning that exchange risk is shouldered entirely by Japan. On the other hand, though high future growth can be expected in Asia, Japan is letting Asia's high growth and high return opportunity slip away as a result of direct investment as the only channel for stable capital reflow in Asia.
4. However, preparing securities infrastructure in Asia will take time. It is necessary for Japan, whose security infrastructure is comparatively developed, to build an Asian funding-reflow regime. An exceedingly suitable method for this would be yen-denominated foreign bonds-"samurai bonds"-that would enable a large-scale reflow of funds with no exchange risk.
5. Samurai bonds not only guarantee comparatively high returns, but they also ease the pressure for a strong yen through the promotion of capital export. It is expected that Japan will soon be facing (1) an increase in the purchase of government bonds by non-residents as a result of large-scale bond issuance and usability increase, and (2) a high probability for the increase of direct inward investment and a growing pressure for a stronger yen. Therefore, the need to increase channels for foreign-capital reflow through the use of samurai bonds will intensify hereafter.

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