DJ: Japan Strengthens Cooperation With Southeast Asia

GREATER NOIDA, India--Japan will work on a variety of measures to strengthen its monetary and financial cooperation with Southeast Asia, including promoting the region's currencies and financial markets by buying government bonds.

Finance Minister Taro Aso detailed the planned steps at a press conference Friday following a gathering of finance ministers and central bank governors from Japan and the Association of Southeast Asian Nations on the sidelines of the Asian Development Bank's annual meeting.

Areas for cooperation include: renewing and strengthening emergency monetary arrangements with the Asean-5--Indonesia, Malaysia, the Philippines, Singapore and Thailand; financing infrastructure development in the Southeast Asia region; and helping Japanese companies to obtain local-currency funding for their operations in Asean.

"Based on the needs of Japanese companies and financial institutions and those of our partners, Japan and Asean countries together can achieve economic growth and build a win-win relationship," Mr. Aso said.

Japan has already used a small portion of its foreign-currency reserves to buy sovereign debt from Asean-5 nations via an investment trust index fund, a finance ministry official said. The aim of the measure is to encourage the issuance of bonds in local currencies and increase the liquidity of those markets--also long-standing goals of the Asean+3.

Large foreign-currency-denominated debts were a major driver behind the Asian financial crisis of the late nineties, when tumbling asset prices and plummeting exchange rates converged, bringing local banks, companies and governments to their knees.

Krishna Hegde, head of Asian credit strategy at Barclays, said that while liquidity was a bigger problem in Asean's local-currency corporate bonds, the varying stages of development of those markets made government debt a safer choice.

"Investing in sovereign bonds gives the benefit of helping deepen the markets while keeping a lid on credit risk," Mr. Hegde said.The region's emergency liquidity facility, the Chiang Mai Initiative, was established following the Asian crisis to help avoid the escalation of any such problems in future, although the amount of funds that can be tapped without signing up to an International Monetary Fund program remains limited.

Japan additionally has bilateral swap arrangements in place with Indonesia and the Philippines, and said it would hold talks with Malaysia, Singapore and Thailand on renewing lapsed agreements that it previously had with those countries.

In addition to facilitating Japanese companies' access to local funding in the countries where they are doing business, Tokyo said it would discuss other ways to support the use of Asian currencies, including by allowing direct exchanges between the yen and the Singapore dollar or Thai baht.

Marc Ostwald, a strategist at Monument Securities, said the steps echoed moves by China to increase settlement in local currencies, reducing reliance on the dollar.

"This is as much a political move as an investment decision, which helps Japan to deepen relations with the Asean grouping, which--as with China and Korea--have not always been particularly good," he said.

Already rocky due to tensions over the ownership of a group of islands, Japan's relations with China, and South Korea too, have worsened after recent visits by several members of Prime Minister Shinzo Abe's cabinet to the Yasukuni Shrine, which memorializes Japan's war dead and is seen as a symbol of the country's previous military ambitions.

At a press conference marking the conclusion of gatherings of the Asean+3--the 10-member Association of Southeast Asia Nations, China, Japan and South Korea--China's Vice Finance Minister Zhu Guangyao said the absence of the country's finance minister and central bank governor wasn't related to its relations with Japan, but the pressing need for them to work on domestic financial reforms.

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