Japanese Institutional Investor and Asia Bond Markets

Abstract

After the Asian currency crisis, the argument about the financial structure and financial markets among Asia countries was moving to the policy identification and formulation stages. The necessity for the local cooperation in a financial field spread as common recognition. Central banks and monetary authorities in the East Asia region set up strengthening bond market in the region following the first agreement of the bilateral swap arrangements in ASEAN plus 3, the Chiang Mai Initiative. This is a second comprehensive bond market program after Brady bond mainly for debt reduction in Latin America countries.

Asia countries expect bond markets to solve two mismatches (a period and currency) which were one of critical factor of financial turmoil in Asia. In order for the Asia bond market to function as markets, not only promotion of the primary bond market but also the secondary market bond to facilitate efficient price formation, timely financing.

The investors, especially institutional investors will play important role for formulation of the bond market. Japanese investor is the second biggest bond investor and the biggest in the region. But their investment to the regional bond market was limited. We outlined their heavily relied on domestic bonds' portfolios compared with other developing countries and also presented the factor of conservative investment stance for risk assets. For instance, regarding investment to the foreign bonds, Japanese institutional investors choused the bonds more than AA grade although they investment lower domestic bonds. We explained their risk evasion by five factors such as a conservative investment guideline, government control, and lack of professionals.

After bankruptcy of some Japanese big companies in 2001, risk management consciousness is uprising in investment communities. They could contribute to the current bond market program if they change their conservative stance.