[ Nippon Keidanren ] [ Policy ]

Promoting Financial Cooperation for a Prosperous Asia

Supporting Asian Growth Through Regional Bond Markets

March 16, 2010

Nippon Keidanren

Promoting Financial Cooperation for a Prosperous Asia (Outline) <PDF>
Supporting Asian Growth Through Regional Bond Markets


As a growth center of the world, Asia is expected to realize its growth potential, achieve further development, and lead the global economy in the coming years. In order for Japan's economy to develop sustainably, we must actively contribute to this process and grow along with the rest of Asia.

The creation of Asian bond and stock markets is essential for invigorating trade and investment in the region through the promotion #1 of economic integration and broad regional infrastructure development. Regarding the development of bond markets, progress has been made through the Asian Bond Markets Initiative (ABMI) endorsed by the Association of Southeast Asian Nations Plus Three (ASEAN+3) Finance Ministers' Meeting and the Asian Bond Fund established by the Executives' Meeting of East Asia Pacific Central Banks (EMEAP), as well as Asia-Pacific Economic Cooperation (APEC) initiatives, but it is still not enough to meet the funding needs of private businesses in the region. In the stock market as well, during the recent financial crisis weaknesses were seen in the form of sudden drops in share values, trading volumes, and numbers of initial public offerings.

To meet long-term funding demand in the region, there is a need to realize multifunctional, balanced bond and stock markets that can provide a wide variety of finance options, including direct procurement by private businesses of long-term funding denominated in local currencies instead of continuing with the current situation of procuring funds through short-term loans in foreign currencies, such as US dollars.

Furthermore, there is a need for effective alliances for public and private funding through public-private partnerships (PPPs) and the like when moving forward with broad regional infrastructure development, including distribution of goods within the region, and large-scale projects. Continued calls for the enhancement of Asian bond markets are part of this. Additionally, there is a need to establish infrastructure funds through public-private collaboration to put the private savings from Asian countries into circulation as investment capital, and also for the Japanese government to provide investment and loans denominated in local currencies.

Another issue related to cooperation within Asia is currency stability, which is a prerequisite for invigorating trade and investment in the region. Important for this are improvements to the Chiang Mai Initiative. At the same time, markets must provide hedging instruments for stabilizing currencies, and it must be kept in mind that both factors are inextricably linked.

From this standpoint, Nippon Keidanren calls on the governments of Japan and other Asian nations, along with market-related organizations in the region, to pursue the following measures to promote financial cooperation within Asia.

1 See "Promoting Regional Infrastructure Development for a Prosperous Asia" (March 16, 2010) for details on methods for promoting broad regional infrastructure development.

1. Development of Bond and Stock Markets in Each Country

Diversification of fund procurement options for businesses in Asia, which have until now been dependent on indirect financing, will be useful in expanding the discretion of finance-related management and invigorating business activities. In particular, issuance of bonds in local currencies offers an advantage for Japanese businesses operating in Asian countries in that it facilitates flexible procurement of long-term funding without incurring currency exchange risks. At the same time, Asian investors can take advantage of the opportunity to invest in attractive financial instruments without exchange risk.

Based on this, the following measures should be implemented in countries across Asia by the target year 2020.

(1) Development of Market Infrastructure and Deregulation

Bond markets in countries across Asia are at various stages of development, from the fully established global markets of Singapore and Hong Kong to the markets of countries in the Mekong region that are just beginning to be created. Each country therefore needs to work at a level appropriate to its present stage of development on diverse market infrastructure including legal and settlement systems, credit guarantees, benchmarking schemes for bond trading markets, and derivatives markets for hedging and arbitrage. Efforts to improve the knowledge and abilities of those who make up a nation's intellectual infrastructure, namely financial officials, market authorities, and academic experts in the nations of the region, are also extremely important.

Toward this end, the Japanese government must team up with financial experts who have advanced knowledge and experience in this field and promote cooperation in the training and development of human resources, from a comprehensive, practical standpoint.

In addition, it is desirable for a framework to be established for dialogue on the introduction of currency and capital transaction restrictions and tax incentives so that restrictions can be relaxed and regulations harmonized between countries to facilitate future cross-border trading. With regard to this point, the Japanese market is not an exception; such positive actions are required of all market authorities.

(2) Fostering Market Actors (Issuing Organizations, Institutional Investors, Intermediary Functions)

In addition to the creation of market infrastructure, what is needed to develop bond and stock markets are (1) issuing bodies that can generate returns and be viewed as creditworthy by external sources, (2) institutional investors that can make rational investment decisions and have opinions about how the market should operate, and (3) intermediary functions that connect investors and issuing organizations through provision of information and development of attractive products and services.

Expansion of issuing markets calls for reinforcement of credit guarantee functions in each country. Currently, credit guarantee functions for the issuance of bonds by Japanese businesses operating in overseas markets are being bolstered by the Japan Bank for International Cooperation (JBIC) and Nippon Export and Investment Insurance (NEXI). The Japanese government should expand the guarantee target range and improve the guarantee functions for bond issue to supplement private credit guarantee institutions for the sake of both Japanese and foreign companies that are thinking of issuing bonds in Asia. In particular, it is important to apply this to small and medium-sized businesses.

Furthermore, institutional investors have diverse fund-management needs, ranging from the long to the short term, and require improvements in legal infrastructural aspects of market functions, as well as information to guide their investment decisions and complex financial products. This will lead to the entry of new intermediary institutions to meet their needs, resulting in an expected expansion of bond-issuance markets informed by the increasing diversity of funding-procurement channels. There is a need for policies to help get the savings stored up in individual Asian countries and across the region to circulate toward institutional investors. Japan's experience in this area can be helpful here. The Japanese financial industry is already promoting cooperation in this field, and in the future, the public and private sectors will have to work together for strategic development.

2. Utilizing Private-sector Funds for the Development of Regional Infrastructure

On the topic of developing a broad regional infrastructure in Asia, "Infrastructure for a Seamless Asia" (2009), a report on joint research conducted by the Asian Development Bank (ADB) and the ADB Institute, indicates that financial resources of approximately $8 trillion will be needed for the 11-year period from 2010 through 2020.

It will be difficult to cover this enormous amount just through funding from national governments in the region and official development assistance (ODA) from involved countries. It requires Japan's public sector to cooperate with the private sector to develop an infrastructure fund scheme through which ODA and other official flows (OOF) can be utilized.

Furthermore, a network based on policy discussions between the public and private sectors should be established so that international institutions and the public and private sectors can forge partnerships in order to promote development of infrastructure finance models that utilize capital markets. The establishment of an independent private-sector infrastructure fund for PPP proposals should also be considered.

It is important that the Japan International Cooperation Agency (JICA) overseas investment and loan program be restarted and utilized for this kind of fund, and that investment and loans as well as the guarantee functions of JBIC, along with the insurance functions of NEXI, be actively utilized while maintaining an appropriate balance of burden sharing between the public and private sectors. In addition, investment and loans as well as guarantee functions of international institutions like the ADB and the World Bank should be readily utilized. It is also worth considering that when the abundant savings in Asia are used for the development of infrastructure, privatization of national corporations responsible for managing newly built infrastructure, such as communications and power supply, could open the way for local fund procurement through equity and bond issuance, for example under the condition that the guarantee of the country's national government will be provided.

3. Promoting Active Use of Japanese Bond Markets

Enhancement of the diversity and fluidity of bond markets throughout Asia is a task that Japan also faces. It will be important for domestic market authorities to make further efforts in this area.

(1) Making Use of Samurai Bond Markets

To make it easier for the emerging economies of Asia to use Japan's markets for "samurai bonds" (yen-denominated bonds issued in Japan by foreign governments or firms), simplification is needed in the procedures necessary for issuing such bonds. Other possible measures could include the provision of guarantees by public institutions to hedge the risk affecting certain countries in the areas of exchange rates and fund transfers. It will also be necessary to extend and enhance the Market Access Support Facility operated by JBIC. #2 Active use of Japan's samurai bond markets will be able not just to help prevent financial crises but also to contribute to further diversification of methods of managing the financial assets of Japanese individuals.

2 As a form of support for regional economies facing difficulties in issuing government bonds due to the recent market turmoil, through this facility JBIC will provide guarantees of up to ¥500 billion for samurai bonds issued by developing countries. Applications for guarantees are accepted through the end of fiscal 2009 (ending March 2010). As of this writing, Indonesia, Colombia, Mexico, and the Philippines have issued a total of ¥330 billion in samurai bonds under this facility.

(2) Boosting Investment of Asian Assets in Japan

The Asian region is projected to see the formation of a vast middle class as regional economies continue to grow. This will be accompanied by the growth of funds to be managed as part of public or corporate pension schemes, as well as an increase in the population and diversity of individual investors. Fund managers and investors will naturally grow more energetic in searching for investment targets beyond their own borders. In order for Japan to respond to this trend and attract more of these funds to its own bond markets, the Japanese public and private sectors will need to sell Japan in Asian economies as an attractive investment destination.

4. Currency Stability

Regional currency stability is a must to invigorate intraregional trade and investment and foster bond markets in Asia. An effective and pragmatic way to increase regional currency stability within the ongoing International Monetary Fund regime, which positions the US dollar as the undisputed key currency, will be utilization of the Chiang Mai Initiative (CMI). In May 2009 the ASEAN+3 nations agreed to shift this currency swap arrangement to a multilateral basis and to expand the fund to $120 billion. To make the CMI an even more effective framework for action, it is hoped that the ASEAN+3 Financial Ministers' Meeting will reach decisions on expanding the number of participant economies, and on lowering the ratio of financial assistance that must meet IMF conditions from the present level of 80% of any CMI swap arrangement. It is also hoped that efforts will continue toward the agreed-on establishment of an independent surveillance unit to oversee the region's economies, exchange rates, and financial authorities.

5. Longer-term Financial Cooperation Issues for an East Asian Economic Community

After each nation in the region completes its preparations of domestic bond markets, the next step will be to organize the infrastructure -- both physical networks and regulatory and other issues -- needed to link these markets. This area represents the issues that Japanese public- and private-sector actors will need to tackle together over the medium and long term in the course of forming the East Asian economic community now being proposed in various quarters. Japan's corporations and government agencies must cooperate with the Economic Research Institute for ASEAN and East Asia (ERIA), the ASEAN Secretariat, and other international organs and take the initiative in forming closer ties among bond markets in the region. Efforts should be carried out in the following six areas.

(1) Creation and Harmonization of Legal Systems for Bond Trading

The Asian region's bond markets should function on the premise of cross-border trading. For this reason, the government of Japan needs to work with other national governments to unify standards for and achieve harmonization of legal systems and regulations dealing with bond issuance procedures, documentation, settlements, disclosure, and other issues. It will be particularly important to determine which nation's legal system is taken as the applicable law for the reconciliation of credit and debt instruments including corporate bonds, for instance when a company has defaulted on its bond obligations. At that time, it is hoped that the Japanese government and other relevant bodies in Japan, including self-regulatory organizations, will show leadership, such as by holding up Japan's case examples for reference.

(2) Harmonization of Accounting and Other Disclosure-related Systems

The regulatory and supervisory agencies for securities trading in each nation need to promote closer cooperation with their counterparts in other nations and with self-regulatory organizations throughout the region, as well as to advance harmonization of disclosure-related systems. They must also aim to establish appropriate systems that do not pose excessive burdens while satisfying both needs of protecting investors and encouraging corporate bond issuance. In the area of accounting systems, the International Financial Reporting Standards, which enjoy global support, should be introduced.

(3) Creation and Enhancement of Credit Guarantee Functions

With respect to the proposed establishment of a $700 million ADB-led credit guarantee and investment facility (CGIF) with JBIC participation, the ADB should make steady progress toward its launch and carry out continuing steps to bolster the facility, including by increasing its funding over time.

(4) Preparation of Intraregional Settlement Systems

The Japanese government must work with other national governments in the region to promote standardization and sharing of settlement systems in each nation. Other important issues are reducing the costs of currency exchange and fund transfers and increasing the systems' trustworthiness.

(5) Creation of a Regional Credit Rating Function

To promote healthy investment in stocks and bonds in the Asian region, there is a need for rating agencies that can rate financial instruments appropriately based on fair disclosure by the issuing parties. ACRAA, the Association of Credit Rating Agencies in Asia, should take the initiative in carrying out these preparations. From the perspective of standardizing rating criteria in a way that can better handle the region's cross-border trading, the criteria should reflect the actual state of Asian corporations, such as regional default probability statistics.

In connection with this, another area requiring attention is that of ratings for infrastructure financing and project-level risk assessment. Here, too, it is hoped that ACRAA and other bodies will take the needed steps.

(6) Enhancement of Information-sharing Functions

To deal with the problem of asymmetric information available to investors, it is vital to increase opportunities available to them to gain information, including but not limited to legally mandated disclosure. For this purpose, there is a need to create an environment in which private-sector actors can carry out information-sharing activities like Asian Bonds Online, a web-based initiative managed by the ADB as part of the Asian Bond Markets Initiative, on a business basis. The role to be played by securities companies will be particularly vital, and steps should be taken in this area.

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