Policy Research Institute

Table of Contents

Vol. 137 : International Capital Flows and Emerging Markets


Summary of Articles

Unconventional Monetary Policy and Emerging Economies

Author
By Shin-ichi Fukuda(Professor, Graduate School of Economics, University of Tokyo)

(Abstract)

Emerging countries have traditionally had economic structures vulnerable to international capital flows. In particular, it has been widely pointed out that since the global financial crisis, unconventional monetary policies adopted by advanced countries have destabilized emerging economies and have become a risk factor for the global economy. This paper examines how advanced countries’ monetary policies have affected emerging economies since the global financial crisis. First, the paper provides an overview of previous studies on the spillover effects of monetary policies. It then analyzes what kind of spillover effects the Japan’s unconventional monetary policy, i.e., the qualitative and quantitative monetary easing (QQE), has had on stock prices in East Asian economies. At the beginning of the QQE, the yen’s steep depreciation had negative spillover effects on stock prices in East Asian economies due to concerns over the “beggar-thy-neighbor” effect. However, as the Japanese economy recovered thanks to the new monetary policy regime, favorable external effects came to be recognized, and this recognition generated positive spillover effects on stock prices in East Asian economies. On the other hand, Japan’s negative interest rate policy, unlike the QQE, had only limited favorable effects on the Japanese economy. In particular, negative long-term interest rates heightened concerns over the soundness of Japanese financial institutions. However, the negative interest rate policy produced positive spillover effects on stock prices in East Asian economies through a mechanism that is entirely different from the existing mechanisms. These results suggest that the effects of Japan’s unconventional monetary policy on emerging countries had natures that were very different from those in other developed countries although the policy objective—massive monetary easing—is the same.


Keywords: unconventional monetary policy, emerging economies, Asian stock markets
JEL Classification; F10, F32, E52

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Effects of Financialization of Energy Markets on International Capital Flows in Emerging Countries

Author
By Tokuo Iwaisako(Professor, Institute of Economic Research, Hitotsubashi University)
By Li Huan(Ph.D. student, Graduate School of Economics, Hitotsubashi University)

(Abstract)

This paper analyzes the effects of energy prices on capital flows in emerging countries by examining economic factors behind energy price fluctuations. Adopting Kilian’s identification strategy for VAR, we decompose the crude oil price change into three structural shock factors—the supply factor, the real-economy demand factor and the price change specific to the crude oil market—and conducte a panel estimation using those structural factors as explanatory variables. We find that the effects of price changes specific to the crude oil market has been strong in the period after 1990, examined in our analyses. Estimating same regressions for individual countries’ data, we also find that price changes specific to the crude oil market have had clear positive effects on capital inflows into emerging countries heavily dependent on imports for crude oil supply, rather than oil-exporting ones. This finding is inconsistent with the interpretation by previous studies that the positive correlation between capital inflows into emerging countries and energy prices is due to the prevalence of resource-exporting countries among emerging countries.


JEL Classification; C32, F32, Q43

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Crude Oil Prices, Capital Flows, and Emerging Economies

Author
By Kentaro Iwatsubo(Professor, Graduate School of Economics, Kobe University)
By Satoru Ogasawara(Professor, Faculty of Economics, Oita University)

(Abstract)

Since 2000, the crude oil price has been repeating ups and downs, generating a significant impact not only on oil-producing countries but also on the global economy. This study identifies domestic and external factors that affect international capital flows by analyzing how changes in the crude oil price have affected international capital flows in emerging countries that are net exporters of crude oil (net exporters) and emerging countries that are net importers of crude oil (net importers).

A rise in the crude oil price raises the value of net exporters’ exports, improving their international balance of payments, while it works against net importers’ balance of payments through an increase in the value of imports. When the crude oil price is rising, countries with a current account surplus due to a large net export of crude oil are assumed to experience an increase in capital outflows, while net importers are assumed to see an increase in capital inflows in line with the deterioration of their current account balance. However, when we look at changes in the balance of external debts in oil price-rising and -falling phases in net importers and exporters, we see an uptrend in the balance of debts in price-rising phases and a downtrend in price-falling phases with respect to both net importers and exporters. In oil price-rising phases, net importers’ international balance of payments deteriorates significantly, a situation that tends to lead to an increase in inflows of foreign capital. On the other hand, net exporters are supposed to experience an increase in capital outflows in line with an expansion of their surplus. However, extra profits from crude oil sales due to price rises bring additional budget revenue, albeit temporarily, and tend to strengthen pressure for fiscal expenditure, and this is considered to cause an increase in capital inflows by promoting economic growth and an associated interest rate rise.

Changes in the crude oil price are correlated with global economic conditions and U.S. interest rates. Therefore, we conducted a panel analysis using changes in the balance of external debts and the current account balance as explained variables in order to identify factors of international capital flows. As a result, we found that in addition to the crude oil price, the U.S. economic growth rate and the budget balance are statistically significant variables, while the U.S. interest rate is not. When we looked at crude oil net importers and exporters individually, it was found that there are more significant variables for net exporters than for net importers. Specifically, in addition to the abovementioned three variables, the inflation rate and the domestic economic growth rate are significantly associated with international capital flows in the case of net exporters. Even though the normalization of U.S. monetary policy may have triggered capital outflows in some emerging countries, the crude oil price and the U.S. economic growth rate have had greater effects on international capital flows than the U.S. interest rates.

Attention should be paid not only to exogenous variables, such as global economic conditions and the crude oil price, but also to the state of domestic economic fundamentals as a significant factor of international capital flows. When we developed a vulnerability index using three macro factors and examined the relationship between this index and the foreign exchange depreciation rate, it was found that a country’s depreciation rate is correlated with the degree of weakness of its fundamentals. If emerging countries are to avoid capital flight, maintaining the soundness of the domestic economy will be an effective way of doing that.


Keywords: international capital flows, crude oil price, emerging countries, fundamentals
JEL Classification: F21, F32, G15

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Malaysian Economy after the Global Financial Crisis
―Capital Flows, Exchange Rate, and Policy Response―

Author
By So Umezaki(Director, Economic Integration Studies Group, Development Studies Center, Institute of Developing Economies, Japan External Trade Organization)

(Abstract)

In the United States, the epicenter of the global financial crisis, large-scale monetary easing, as exemplified by a de facto zero interest rate policy and three rounds of quantitative easing (QE), was implemented, and that became a trend in other developed countries as well. Meanwhile, as the U.S. monetary easing moved toward an exit following a reference to “tapering” made in May 2013 by then Federal Reserve Chair Ben Bernanke, the inflow of capital into emerging countries, including Malaysia, started to reverse, triggering a plunge in the value of the ringgit, the Malaysian currency. The crude oil price decline since 2014 and the 1MDB scandal, which came to light in the middle of 2015, added to the downward pressure on the ringgit.

The Bank Negara Malaysia (BNM), which is Malaysia’s central bank, responded to these events by implementing conventional monetary policy measures, such as changing the policy interest rate and the reserve requirement, and it also supported the ringgit by conducting foreign exchange market interventions as necessary. In late 2016, the BNM effectively enhanced capital controls in order to curb speculative trading of the ringgit in the offshore market. At the same time, the BNM carried out a series of financial system reform, including the introduction of an additional capital control measure, with the aim of improving the stability and efficiency of the onshore foreign exchange market. As a result, although an additional capital outflow occurred at one time, the international capital flow and exchange rate movements showed signs of stabilizing. However, as capital has flowed out and the ringgit has depreciated under a new government that was inaugurated in May 2018, the BNM needs to continue to be careful in its monetary policy management.


Keywords: Malaysia, international capital flows, capital control, exchange rate
JEL Classification: F31, F38, O35

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International Capital Flows and Vulnerabilities of the Indonesian Economy

Author
By Miki Hamada(Senior researcher, Development Studies Center, Institute of Developing Economies-Japan External Trade Organization (IDE-JETRO))

(Abstract)

As a result of large and persistent capital inflows after the global financial crisis, Indonesia’s currency rupiah was considerably affected by the end of Quantitative Easing and has continued to depreciate. In 2013 when the U.S. move toward the exit from the monetary easing, monetary policy of Indonesia was positively evaluated for alleviating the impact by gradually raising interest rates and allowing the rupiah’s exchange rate flexible instead of conducting market interventions. However, the rupiah remained weak and because of the Turkey’s lira crisis in August 2018 the rupiah depreciated further. Although Indonesia has tried to stabilize the rupiah through interest rate hikes and active foreign exchange interventions, its current account deficit has expanded because of an increase in imports for infrastructure investments, so the rupiah has come under increased downward pressure. In order to reduce the current account deficit, Indonesia is being forced to take policy measures that could affect economic growth negatively, such as introducing import restrictions.


Keywords: international capital flows, foreign exchange, monetary policy, Indonesia
JEL Classification: G10, F32, O53

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China’s Economic Growth and International Capital Flows

Author
By Qing-yuan Sui(Professor, International College of Arts and Sciences, Yokohama City University)

(Abstract)

Contrast with Japan's high growth experience, the growth and development in post-reform China have largely depended on foreign capital. China has accumulated huge amount of foreign reserves through current surplus and inward foreign direct investments (FDI). To the extent that the management of foreign assets has been inefficient and the huge amount of foreign reserves stands for some degree of international inequilibrium, reforming the foreign reserve holding management is a high priority. From the mid-1990s to the outbreak of Global Financial Crisis, the inward FDI to China has been large and relatively stable. However, the source of fund has been concentrated in some particular regions and the investment destinations are concentrated in eastern coastal regions, so the use of foreign capital is likely to enlarge the regional unbalance. Except for some special periods, both the inflow and outflow of portfolio investments have been relatively small. The so-called hot money has been highly correlated with other investments, which means that more attention should be paid to the capital flows through banking sector.

In the parts of time-series analysis, we found that after the Global Financial Crisis, hot money to China has come to respond the monetary policy stance of U.S. in a way more consistent with economic theories than before. Although foreign direct investments do not largely react to the monetary policy of U.S., portfolio investments are more sensitive to the spread of interest rate.


Keywords: Chinese economy, international capital flows, spillover effects, hot money
JEL Classification: E4, F2, F4

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Spillover Effects of Asian Financial Markets on the Global Markets

Author
By Mariko Tanaka(Associate Professor, Faculty of Economics, Department of Economics, Musashino University)
By Shin-ichi Fukuda(Professor, Graduate School of Economics, University of Tokyo)

(Abstract)

This paper aims to find out how much stronger the spillover effects of a shock in Asian financial markets on the global financial markets have become since the GFC (Global Financial Crisis). In the first half of the analysis, the paper analyzes spillover effects in stock markets. An estimation based on a GVAR model shows that the impacts of a shock in Asian emerging economies have become stronger since the GFC. However, the increase in Asian impacts is attributable to a shock in the manufacturing sector, rather than in the financial sector. This suggests that the increase in the spillover effects since the GFC reflects an increase in the impacts of a shock in the manufacturing sector in Asian emerging economies. In the second half of the analysis, the paper examines spillover effects across foreign exchange rates, focusing on effects originating from the Chinese Yuan. Based on the data on changes in the Chinese Yuan’s exchange rate between 1 a.m. and 2 a.m. GMT, this analysis reveals that exchange rate policy changes made by the People’s Bank of China (PBC) have had positive spillover effects on many developed countries since the summer of 2015. The results of this empirical analysis suggest that amid the growth in Asia’s presence in the global economy, Asia’s impacts are increasing in the global financial markets as well.


Keywords: emerging economies, cross-border spillover effects, Asian financial market
JEL Classification: F10, F32, E52

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