By Steven C. Johnson and Daniel Bases
NEW YORK, April 19 (Reuters) - A steady flow of cash into
emerging markets could become a flood as the Bank of Japan's
huge stimulus program may prompt the nation's investors to chase
higher returns - but for some developing countries that could be
too much of a good thing.
The fear is that a big fresh influx of foreign money could
overheat those markets, triggering higher prices and pushing
currencies higher, which would make a country's exports more
expensive while pulling in cheaper imports that could hit
domestic producers. The money may also disappear as fast as it
arrived if returns became better elsewhere.
Global investors were loading up on Mexican, Russian and
other bonds even before the Bank of Japan (BOJ) announced on
April 4 its attempt to end decades of stagnation by pumping $1.4
trillion into the economy. Global inflows into local currency
emerging market debt funds in the first quarter were the biggest
in two years, Thomson Reuters' Lipper service data shows.
A 15 percent drop in the yen so far in 2013, and a 28
percent gain in Japanese stocks, has prompted Japanese investors
to bring some cash back home in recent months. But analysts
expect Japan's appetite for foreign assets to increase again
given low yields on Japanese deposits and bonds.
'A lot of money is still likely to leave Japan,' said
Citigroup currency strategist Steven Englander. 'Some of it has
to go into emerging markets.'
Bank of America Merrill Lynch estimates that Japanese retail
investors, collectively referred to as 'Mrs. Watanabe,' the
mythical manager of household savings, hold some $16.8 trillion
in assets, with a bit more than half in deposits and cash.
Emerging markets, with their strong growth rates and high
interest rates, 'may attract a significant portion of these
savings,' strategists at Bank of America told clients in a
Concerns that money created by central banks, such as the
U.S. Federal Reserve and the BOJ, will pour into developing
markets was high on the agenda of the finance leaders of the G20
group of advanced and emerging economies this week in
In a communique after the meeting, G20 leaders said they
would be 'mindful' of side effects of extended monetary
'Monetary policy should be directed toward domestic price
stability and continuing to support economic recovery, according
to the respective mandates of central banks,' the statement
HUNTING FOR YIELD
In the past five years, emerging economies have accounted
for almost three-quarters of global growth, the IMF says.
That's fueled a big move into local currency funds, which
pulled in more than $16.7 billion in the first quarter of 2013,
the best this relatively young sector has seen in more than two
years, according to Lipper. Hard currency funds attracted cash
in the first three months of the year, albeit at half the pace
seen in the fourth quarter.
The inflows come despite disappointing returns so far in
2013. Local currency debt funds lost 1.05 percent while hard
currency debt funds dropped 2.2 percent in the first quarter.
There was a surge of inflows into Japanese 'toshin'
investment trusts - funds with exposure to foreign assets - late
in 2012, but Japanese investors repatriated funds heavily in
February and March. The Nikkei 225's rally was partly
due to expectations a weaker yen would boost export revenue for
Japan's top companies.
Still, analysts at Nomura expect 'toshin momentum to recover
gradually, as retail investors have clearly become more
risk-tolerant.' Recent Ministry of Finance data showed flows
into these investment trusts hit a seven-month high in March.
Emerging market assets remain attractive thanks to higher
yields vs record low rates in Japan. In Mexico, Brazil, Russia
and South Africa, sovereign bonds offer 300 to 900 basis points
more in yield than Japanese government bonds. Many expect the
BOJ's stimulus to push yields on 10-year Japanese bonds,
currently at 0.6 percent, even lower.
'If you think U.S. investors are yield-starved, remember,
we're only five years into this period of low rates. The
Japanese are 20 years in,' said Brendan Clark, president of
Clark Capital Management Group in Philadelphia. 'They are
absolutely going to be looking for yield.'
To be sure, a healthy share of assets will almost certainly
flow into U.S. Treasuries. Even with Treasury yields near record
lows, the 1.70 percent earned on a 10-year U.S. note is more
than a percentage point better than comparable Japanese bonds.
And some investors say the impact on some emerging markets
will be modest.
'On the margin it will benefit emerging debt, but you
shouldn't go head over heels thinking this is a big bazooka that
will bring floods of liquidity into every market,' said Steve
Ellis, who runs an emerging market debt fund at Fidelity
Worldwide Investments in London.
According to Lipper, the highest percentage of Japanese
inflows into emerging-market debt have been into Turkey,
Indonesia and Mexico. Flows into Japanese-domiciled funds that
invest in Brazilian debt were strong through the end of 2012,
but since then they have seen three months of outflows.
Japanese interest in funds that focus on currencies, so
called double-decker funds, has begun to recover after slumping
from a high reached in 2010. Lipper Japan data shows inflows
rose to nearly 776 billion yen ($7.91 billion) in the first
quarter, the highest inflow since the third quarter of 2011.
Funds that tap the performance of Brazil's real and Turkey's
lira drew the most interest.
Global investors eager to ramp up exposure to emerging
markets will have to tread carefully, though. Too much money
could provoke inflation and instability in some emerging markets
and push their governments to retaliate with capital controls
and currency intervention, beyond what's in place already.
Latin America has absorbed $400 billion in foreign
investment into financial markets in the last five years, and
excessive currency gains could hurt their exporters.
BOJ Governor Haruhiko Kuroda said on Thursday he did not see
signs of asset price bubbles 'brewing in emerging nations', but
said stimulus 'may affect emerging economies including through
In 2010, when a wall of money washed onto Brazilian shores
and pushed its currency, the real, to successive highs, about
$26 billion came from Japanese currency-focused toshins, Lipper
data showed. They were lured by a 12.5 percent benchmark
interest rate in Brazil at that time.
That rate has fallen since but it was lifted to 7.50 percent
from 7.25 percent on Wednesday as Brasilia tries to curb
inflation. Flows into Japanese funds focused on the real rose to
$2.93 billion in the first quarter, the largest quarterly inflow
since the third quarter of 2011, Lipper data shows.
A tide of new money could also test the reform-minded
Mexican government's commitment to free-floating exchange rates,
though some say lower yields in Mexico should keep incoming
flows from matching those that swamped Brazil.
'Compared with the nightmare Brazilian authorities
experienced, Mexican authorities will sleep well,' said Yujiro
Goto, an analyst at Nomura Securities in New York.
(Additional reporting by Michael O'Boyle in Mexico City and
Sujata Rao in London and Richard Leong in New York; Editing by
David Gaffen, Martin Howell and Leslie Gevirtz)
Keywords: GLOBAL INVESTMENT/JAPAN (REPEAT
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