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Policy Research Institute

Table of Contents

Vol. 133 : Development and Integration of Financial Markets in Asia

Summary of Articles

Quantity and Quality Measures of Financial Development:
Implications for Macroeconomic Performance

By Masahiro Kawai(Project Professor, Graduate School of Public Policy, University of Tokyo/ Representative Director and Director-General, Economic Research Institute for Northeast Asia(ERINA))
By Hiroyuki Ito(Department Chair, Professor of Economics, Portland State University)


Financial development is often measured by financial depth such as the stock of private credit and market capitalization as a share of GDP. Such a measure focuses on the quantity aspect of financial development. In this paper, we propose measures that capture both the quantity and quality aspects of financial market development. For quantity measures, we construct a composite index with multiple variables which gauge the size and depth of the banking, equity, bond, and insurance markets. For quality measures, we create a composite index that reflects the degree of financial market diversity, liquidity and efficiency, and the institutional environment. The last factor captures the development of legal systems and institutions, human capital, and information and telecommunications infrastructure. We find that the quantity and quality measures are highly correlated with each another for advanced economies and Asian emerging market economies, but not for other economies. The disaggregated components of the quality measures suggest that it is the level of legal and institutional development that differentiates advanced economies from emerging and developing economies in terms of the quality measures. Compared to advanced economies, emerging and developing economies tend to have low levels of market diversity, liquidity, and efficiency. Our simple regression analysis shows that the quality measure of financial development has a positive effect on output growth and negative effects on output volatility and inflation for the sample of emerging and developing economies with relatively high-quality financial development. We also observe that a higher level of financial development, particularly in terms of quality, tends to lead to greater financial openness, and that greater financial openness tends to be associated with low growth, high growth volatility and high inflation for emerging and developing economies with low quality measures of financial development, while such undesirable impacts of financial openness can be mitigated by raising the quality of financial development.

Keywords: quantity and quality measures, financial development, financial liberalization, financial openness, impacts on macroeconomic performance
JEL Classification: E44, G2, O16

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Integration of Financial Markets in Japan and Asia
-Financial Deepening in Asia due to Japanese Banks Entry

By Mitsuru Yaguchi(General Manager and Chief Economist, Institute for International Monetary Affairs (IIMA))
By Ayako Yamaguchi(Senior Economist, Institute for International Monetary Affairs (IIMA))
By Koji Sakuma(Professor, Kyoto Tachibana University/ Visiting Research Fellow, Institute for International Monetary Affairs (IIMA))


Looking back at Japanese banks’ activities in Asia since the 1980s, we see that they have steadily expanded credit provision and other business operations amid the growing sophistication of needs while euro-area banks have restrained their activities in the region, particularly since the global economic and financial crisis in 2007-2008. Above all, in the ASEAN (Association of Southeast Asian Nations) region, Japanese banks have actively pursued the acquisition of capital or business alliances with local banks since around 2012 in order to capture the increasingly sophisticated and diverse needs of the region.

As a result, in the field of financial services for retail and corporate customers, there have been spillovers of financial technology from Japanese banks to the local banks which they have acquired or with which they have formed alliances. In the retail sector in particular, financial techniques have been transferred from financially developed countries to financially underdeveloped countries through the international networks of local banks which Japanese banks have acquired or with which they have formed alliances.

Moreover, when local banks are acquired by Japanese banks, the level of know-hows concerning the business administration as broadly defined, including adaptation to global financial regulations and national legislative framework, is immediately raised to a level equivalent to the Japanese level. We may also point out the possibility that as those local banks’ activities serve as best practices, their effects may spread throughout the relevant countries through the financial supervisory authorities. As described above, in a sense, Japanese banks’ entry into Asia contributes to the region’s financial deepening. This may be taken as evidence that the integration of financial markets in Japan and Asia is gradually proceeding at the financial institution level.

Keywords: Asia, overseas business expansion, spillover effects, banks, financial technology, ASEAN, acquisition, alliance
JEL Classification: G15, G21, O16

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Issues facing Renminbi Internationalization
-Observations from Chinese, regional and global perspectives-

By Chi Hung KWAN(Senior Fellow, Nomura Institute of Capital Markets Research)


In this paper, we present the issues facing internationalization of China’s renminbi from three perspectives: (1) China’s own perspective centering on the “liberalization of capital transactions,” (2) a regional perspective based on “currency zones,” and (3) a global perspective focusing on the "international monetary system.” For the renminbi to become a truly international currency, three prerequisites must be met. (1) From the viewpoint of China, which is the issuer of the renminbi, it must further develop its financial markets while at the same time liberalize capital transactions so that both residents and nonresidents have equal access to these markets. (2) From the regional viewpoint, confidence in the renminbi must be established and countries with close ties to the Chinese economy (mainly neighboring states) must adopt foreign exchange policies that seek stability of their own currencies against the renminbi (which means, in effect, the formation of a “renminbi zone”). (3) From the global viewpoint, the economic size of the RMB zone centered on China must be comparable to the dollar zone centered on the United States and the eurozone centered on the European Union. While progress is being made toward fulfilling these three prerequisites, many obstacles still need to be overcome. In particular, China’s strict controls over capital transactions have remained a major hindrance to progress toward internationalization of the RMB.

Keywords: renminbi internationalization, renminbi zone, forex policy, international monetary system, liberalization of capital transactions
JEL Classification: F31, F33, F36

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ASEAN Financial Integration: Opportunities, Risks, and Challenges

By Aladdin D. Rillo(Senior Economist, Asian Development Bank (ADB) Institute)


ASEAN economies have become more financially integrated over the past decade. Both de-facto integration and regional agreements under the ASEAN Economic Community (AEC) have resulted in increasing financial links among countries in the region. Regional initiatives in financial services liberalization, capital market development, and capital account liberalization have also been contributing to the deepening of regional financial markets. In fact, by end-2015, ASEAN countries have completed 87% of all measures under the AEC Blueprint, to achieve free flow of services and freer flow of capital in the finance sector. However, while regional financial integration is clearly increasing, ASEAN economies seem to be more integrated with global financial markets than with their regional neighbors, as suggested both by quantity-based and price-based measures of integration. This is due to limited opportunity for risk diversification within the region, absence of adequate liquidity, lack of adequate financial infrastructure links, and gap in regulatory quality among countries particularly the need to harmonize/maintain minimum standards and regulations. Thus, to further deepen financial integration in ASEAN, it is crucial that: (a) policies that promote the development of financial markets should continue to be a priority; (b) ASEAN should aim to strengthen the implementation of programs at the national level; (c) monitoring of regional financial integration should be pursued with greater urgency; and (d) since regional financial integration is not an end by itself, but a policy instrument designed to achieve development goals, greater macroeconomic and policy coordination is needed.

Keywords: financial integration, financial globalization, ASEAN, economic integration, ASEAN Economic Community
JEL Classification: F1, F4, F6, F15, F36

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Infrastructure Investment Finance in Asia

By Toshiro Nishizawa(Project Professor, Graduate School of Public Policy, University of Tokyo)


Finance for infrastructure investment in Asia has shown unique characteristics from country to country, from period to period and from sector to sector. Major part of infrastructure investment is financed by public sector fund generally and in Asia as well. Availability of foreign fund has impacts on infrastructure investment in some cases but not necessarily in others. The role of Official Development Assistance (ODA) for infrastructure investment, however, is significant in many developing countries. Meanwhile, Public-Private Partnerships (PPPs) have been introduced in recent years as an alternative to public sector infrastructure investment in the face of huge demand for infrastructure under public sector funding constraints. Successful PPPs, however, could be expected only in selected countries and sectors so that PPPs' share in total infrastructure investment remains limited. Premature introduction of PPPs without well-developed institutional frameworks and implementation capacity could end up with public sector support and remedial measures. In light of the nature of infrastructure investment, the complementary use of foreign fund to fill the deficiency of domestic savings is warranted, but enhanced infrastructure investment requires well-developed capital markets to mobilize domestic savings into long-term investment. Finance for infrastructure investment and integration of regional financial markets should be pursued in this context and ideally be promoted by keeping pace with capital market development in individual countries.

Keywords: Asia, Asian Bond Markets Initiative (ABMI), infrastructure investment, Public-Private Partnerships (PPPs), financial market integration, financial intermediation, capital market, Official Development Assistance (ODA), project finance
JEL Classification: F21, F36, H54

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Development of Asian Bond Markets and Challenges
-Keys to Market Expansion-

By Satoshi Shimizu(Senior Economist, Economics Department, The Japan Research Institute, Limited)


Asian bond markets have expanded significantly in terms of quantity and have grown more mature than before in terms of quality. However, the degree of bond market development varies widely across countries, and the formation of well-balanced financial systems has yet to be completed. In South Korea and Malaysia, whose corporate bond markets are relatively well developed, laws, regulations and market infrastructure have been established as a result of market development efforts that have been made since before the Asian financial crisis of 1997 and there are many bond issuers and investors. On the other hand, in other countries such as the Philippines and Indonesia, where market development has lagged behind, the issuance of corporate bonds started in earnest only in the middle of the 2000s. As a result, policy measures for market development have not necessarily been implemented sufficiently and there are relatively few issuers and investors. In addition, as these countries have structural problems in their financial systems, it is difficult to change the situation in which banks act as the main providers of finance. In the future, it will be necessary to devote efforts to market development and continue to hold discussions on the role of the corporate bond market. Meanwhile, concerning countries whose corporate bond markets are well developed as well, there remain many problems that must be corrected, such as the ill-balanced mix of issuer industries and the underdevelopment of investors’ investment skills, leaving room for further market development.

Keywords: Asian Bond Markets, Asian Bond Markets Initiative (ABMI),Asian Bonds Online,Credit Guarantee and Investment Facility (CGIF), ASEAN+3 Bond Market Forum (ABMF),factors of bond market development,financial system, institutional investors
JEL Classification: F36,G23,O16

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Quest for Financial Stability in East Asia:
Establishment of an Independent Surveillance Unit “AMRO” and Its Future Challenges

By Akkharaphol Chabchitrchaidol 
By Satoshi Nakagawa(Special Advisor to the President for Global Strategy, Japan Credit Rating Agency, Ltd.; Chairman, Association of Credit Rating Agencies in Asia)
By Yoichi Nemoto(Visiting Scholar, Policy Research Institute, Ministry of Finance, Japan)


The Regional Financial Cooperation in East Asia advanced institutionally in the aftermath of the Global Financial Crisis. The network of bilateral swap agreements (BSA) under the Chiang Mai Initiative (CMI) was multilateralized (CMIM) in 2010. An independent surveillance unit called the ASEAN+3 Macroeconomic Research Office (AMRO) was established in 2011. Focusing on AMRO, this paper aims to indicate (1) salient features of the surveillance activities conducted by AMRO when it was initially established as a private company (“AMRO (Company)”) in 2011, (2) background and major changes upon the transformation of AMRO (Company) into an international organization (“AMRO (IO)”) in 2016, and (3) remaining challenges for AMRO (IO) toward the monetary and financial stability in East Asia.

AMRO (Company)’s surveillance was characterized in that (1) it was undertaken in line with the needs of the ASEAN+3 authorities and (2) greater attention was paid on (a) short-term movements of private capital flows and (b) economic inter-linkages among ASEAN+3 where shocks may be transmitted. Upon the transformation into an international organization, AMRO (IO) was given new mandates to (1) support the CMIM’s operation and (2) publish its surveillance reports as per its pre-determined publication guideline. Remaining challenges are suggested, among others, on (1) developing AMRO’s policy recommendation capacity, (2) enhancing AMRO’s roles in CMIM activation process, (3) leading the discussion on the CMIM’s coordination with bilateral and global support facilities, and (4) constant improvement of statistics.

Keywords: AMRO, ASEAN+3, ASEAN+3 Macroeconomic Research Office, Chiang Mai Initiative Multilateralization, CMIM, Economic Review and Policy Dialogue, Establishment of International Organization, Global Financial Crisis, Global Financial Safety Net, International Monetary Fund, Regional Financial Cooperation
JEL Classification: E44, F32, F42, F53, G15

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