currency turbulence, regional monetary cooperation and … · 2018-10-12 · motivation • in east...

Currency Turbulence, Regional Monetary

Cooperation and Investment

Opportunities in Asia

Hitotsubashi University

Eiji Ogawa

Economic Seminar@SOFOFA

10/2/2018

Motivation

• In East Asia, de jure and de facto economic integration has

been established. Governments of East Asian countries

have been concluding Free Trade Agreements (FTA) with

each other while manufacturers have already established

supply chains and production network within East Asia.

• Although East Asian countries have achieved high

economic growth, their growth rates are diminishing in the

recent years. Some of them face middle income trap.

Wage costs are increasing.

• Moreover, they still face exchange rate volatility and

misalignments which impede international trade and FDI.

• Is there still investment opportunities in East Asia? 10/2/2018


2

Objectives

• I cite “Survey Report on Overseas Business Operations by

Manufacturing Companies” which the Japan Bank for

International Cooperation (JBIC) conducted in 2017 in order that we should know whether there is still investment

opportunities in East Asia.

• I explain exchange rate risks which impede foreign direct

investments (FDI) as well as international trade. We

consider what kind of exchange rate risks manufacturers

face in conducting FDI into East Asia?

• I explain a regional monetary cooperation for exchange rate

stability in East Asia and its limitation to mitigate exchange

rate instability.

10/2/2018


3

10/2/2018


4

Contents • Promising countries in East Asia for overseas

business over the medium-term and their reasons and issues

• Intra-regional exchange rate stability for trade, FDI, and economic development

• Asian experiences in the global financial crisis (GFC)

• Effects of FRB’s raising interest rate on East Asian currencies

• Regional monetary cooperation in East Asia and its limitation

Survey Report on Overseas Business

Operations by Manufacturing Companies

• The JBIC conducted survey regarding overseas business

operations by Japanese manufacturing companies in 2017.

• Survey targets: Japanese manufacturing companies that

have three or more overseas affiliates (including at least

one production base)

• No. of companies questionnaires were mailed to: 1,001.

Responses returned: 602 (response rate: 60.1%)

• “Overseas business operations” is defined as production,

sales, and R&D activities at overseas affiliates, as well as

outsourcing of manufacturing and procurement.

10/2/2018


5

Fig. 1: Promising Countries for Overseas

Business over the Medium-term (next 3 yrs)

10/2/2018


6

Reasons for regarding countries

as promising and Issues: China

10/2/2018


7

Reasons for regarding countries

as promising and Issues: Vietnam

10/2/2018


8

Reasons for regarding countries as

promising and Issues: Thailand

10/2/2018


9


promising and Issues: Indonesia

10/2/2018


10


promising and Issues: Philippines

10/2/2018


11


promising and Issues: Myanmar

10/2/2018


12

Summary of the survey report

• Promising countries for overseas business are

China, Vietnam, Thailand, Indonesia, Philippines,

and Myanmar among East Asian countries.

• Common factors of promising countries include

“future growth potential of local market,” “current

size of local market,” and “inexpensive source of

labor.”

• Common issues include “rising labor costs,”

“Intense competition with other companies.” and

“Execution of legal system unclear.”

10/2/2018


13

Intra-regional exchange rate stability for

trade, FDI, and development

• Manufacturers in East Asia seek for cheaper labor

to conduct FDI into other East Asian countries. FDI

should be accompanied with accumulation of real

capital and transfer of technology. Both of them

contribute to economic development.

• They have already established production network

in East Asia. Parts are moved along supply chains

inside of East Asia. They are assembled into final

products which are exported to the US and Europe

as well as Japan.

10/2/2018


14

Two kinds of exchange rate risks for

manufacturers in East Asia • Manufacturers face two kinds of exchange rate

risks:

(1) Exchange rates against the USD and the EUR

when they focus on final consumption countries

(the US and Europe)

(2) Intra-regional exchange rates when they focus on

production network or supply chain.

10/2/2018


15

Production network and final

consumption countries in East Asia

10/2/2018


16

Japan

(JPY)

China

(RMB)

Korea

(KRW)

ASEAN (THB etc.）

Production network in East Asia Final consumption countries

US

(USD)

Europe

(EUR)

10/2/2018


17

AMU and AMU DI for East Asia

• AMU and AMU Deviation Indicators (AMU DIs) （http://www.rieti.go.jp/users/amu/index.html)

(1) AMU（Asian Monetary Unit）: a weighted average of East Asian (ASEAN+3 (China, Japan, and Korea)). Weights are based on GDP shares and intra-regional trade amount shares.

(2) AMU DI (Deviation Indicator): overvaluation/undervaluation of each East Asian currency against the AMU based on benchmark period (2000-2001)

AMU and AMU DI for production

network and final consumption

10/2/2018


18

JPY

RMB KRW

ASEAN

Currencies

Production network in East Asia Final consumption countries

USD

EUR

AMU AMU

DI

10/2/2018


19

Fig. 2: AMU against USD and EUR

Data: RIETI (http://www.rieti.go.jp/users/amu/index.html)

http://www.rieti.go.jp/users/amu/index.html

10/2/2018


20

Fig. 3: AMU Deviation Indicators



Effects of the GFC on East Asia • The GFC had a direct and indirect effects on the global

economy:

1. Direct effect: It damaged balance sheet of financial

institutions in the US and Europe. Little effects on financial

institutions in East Asia.

2. Indirect effect:

(1) Drop of asset prices shrank consumption and investments

in the US and Europe shrank exports from East Asia to the

US and Europe

(2) Financial institutions faced USD liquidity shortages. The

FRB conducted the QE monetary policy for domestic

financial institutions and implemented currency swap

arrangements for other central banks.


10/2/2018 21

Fig. 4: AMU Deviation Indicators of

JPY, KRW, and RMB

10/2/2018


22



10/2/2018


23

• AMU DIs of East Asian currencies shows their asymmetric reactions before and after the GFC.

• The JPY was undervalued from 2005 to 2007. It appreciated from 2007 to 2008. It was overvalued from 2009 to 2012.

• The KRW had 20% of overvaluation from 2005 to 2007. It depreciated by 47% points against the AMU. It was undervalued from 2009 to 2013.

• The RMB appreciated against the AMU in 2008. It depreciated from 2009 to 2010.

Asymmetric reactions of East Asian

currencies

FRB’s Exit Strategy from Quantitative

Easing Monetary Policy • The FRB has slowed down the pace of purchasing MBS

and long-term Treasury securities toward an exit strategy of

quantitative easing monetary policy since January 2014.

Eventually, it decided to purchase no MBS and long-term

Treasury securities per month on October 29, 2014.

• It decided to raise the target range for the FF rate from 0% -

0.25% to 0.25% - 0.5% on December 16, 2015. It has

gradually raised FF rate about three times in a year.

• It made announcement of Policy Normalization Principles

and Plans in order that it would make gradual reduction of

its holding asset or its balance sheet in September 2014. It

has started the normalization program from October 2017.

10/2/2018


24

Fig. 5: Policy interest rates in FRB,

BOJ, and ECB


Data: Datastream

10/2/2018 25

Fig. 6: Monetary bases of FRB, BOJ,

and ECB


Data: Datastream

10/2/2018 26

Expected effects of FRB’s raising

interest rate on East Asian currencies • The FRB’s exit strategy of the QE monetary policy

as finishing the QE monetary policy, removing the

zero interest rate policy, and reducing the assets or

the monetary base is expected to flow the money

from emerging market countries back to the US.

The flow back of the money would bring about

depreciation of their home currencies and/or

increase in domestic interest rates.

10/2/2018


27

Expected effects on intra-regional

exchange rates • In addition, we experienced asymmetric

movements among the JPY and other East Asian

country currencies due to the so-called yen carry-

trades (financing JPY with a lower interest rate and

investing in another currency with a higher interest

rate) when interest differentials increased before

the global financial crisis.

• Among countries whose policy reaction to the

increase in the US interest rate are different,

interest rate differentials are widened. It stimulates

intra-regional capital flows.

10/2/2018


28

Fig. 7: Responses of interest rates to

FRB’s raising interest rate

10/2/2018


29

Data: Datastream

Fig. 8: Responses of exchange rates

to FRB’s raising interest rate

10/2/2018


30

Data: Datastream

Appreciation

of USD

Regional monetary cooperation for

mitigating currency turmoil • Given that the FRB’s raising interest rates has

possibility to give any turbulences to emerging

market countries, the monetary authorities of these

countries should prepare for any crisis prevention

by making surveillance over movements in interest

rates and exchange rates as well as sudden

changes in capital flows.

• In addition, they should in advance establish crisis

management scheme to give prompt financial

support to a crisis-hit country.

10/2/2018


31

10/2/2018


32

Regional monetary cooperation in

East Asia • Chiang Mai Initiative (CMI) was established by

ASEASN+3 Financial Ministers in 2000.

(1) Crisis management: a network of bilateral currency swap arrangements (CSA) for crisis management

(2) Crisis prevention: surveillance process (Economic Review and Policy Dialogue (ERPD) of ASEAN+3) at deputy finance minister meeting for crisis prevention.

• From CMI to CMI Multilateralization (CMIM) in 2010.

(1) Foreign reserve pooling

(2) Multilateral decision-making process for implementing currency swap arrangement.

• ASEAN+3 Macroeconomic Research Office (AMRO) was established as an independent surveillance unit in 2011.

10/2/2018


33

Limitation of CMI • Limitation of CMI includes IMF link: the CSA will be

implemented only after IMF decides to give financial rescues to a crisis-hit country.

• Korean government did not implement a CSA under the CMI due to the IMF link. But it has concluded a new CSA with FRB and implement it promptly while BOK has concluded a CSA in terms of yen/won with BOJ.

• The reason is why Korea experienced severe situation under the strict conditionarity of IMF.

• In 2009, IMF implemented lending policy improvement which includes creating Flexible Credit Line (FCL) as well as modernizing conditionality. The Korean government did not request IMF any financial rescue including the FCL.

10/2/2018


34

Beyond the limitation of CMI

• It is necessary to reduce or eliminate the IMF link of CSA under CMI in order that CMI should be effective for regional monetary cooperation in East Asia.

• At the same time, it is necessary to establish a secretariat who make surveillance over East Asian countries and implementation of CSA in order that CMI should not depend on IMF’s surveillance.

• Under the surveillance of CMI, intra-regional exchange rates should be focused on. For the purpose, the AMU and AMU Deviation Indicators should be used for surveillance.

Increasing the role of AMRO for

regional monetary stability • The monetary authorities of East Asian countries should

care about capital flows and their effects on interest rates

and exchange rates especially when the FRB raises FF rate.

• ASEAN+3 Macroeconomic Research Office (AMRO) should

monitor capital flows, interest rates and intra-regional

exchange rates under the regional monetary cooperation

under the CMIM. It should collect data and information

regarding capital flows in intra-region as well as from and

into the US and Europe. For the purpose, its capacity

should be strengthened further to work very well.

• We should focus on developing capacity of AMRO to

secure regional monetary cooperation for regional currency

stability in the path of Asian cooperation in the future. 10/2/2018


35

Conclusion • According to the JBIC’s “Survey Report on Overseas

Business Operations by Manufacturing Companies,” there

is still investment opportunities in East Asia. However, they

have issues which include “rising labor costs,” “Intense

competition with other companies.” and “Execution of legal

system unclear.”

• Manufacturers face the two kinds of exchange rate risks

against the USD and the EUR for final consumption

countries and intra-regional exchange rates for production

network.

• East Asia has been establishing a regional monetary

cooperation for exchange rate stability though not yet

enough.

10/2/2018


36

10/2/2018


37

Gracias!

currency turbulence, regional monetary cooperation and … · 2018-10-12 · motivation • in east...

Documents