Big Capital Flows Into Asia Need To Be Watched

Bank of Japan Deputy Gov. Toshiro Muto said Tuesday that big capital flows into Asia need to be watched carefully because they could cause problems such as rises in asset prices fueled by excess liquidity.

His remarks come as the U.S. subprime loan crisis causes turmoil in Asian markets as well, underlining the region's sensitivity to global market developments. "Responding to the abundant capital inflows in recent years hasn't been easy, and has caused Asian authorities to face various problems," Muto said in a speech about the Asian economy at a local conference. For example, many Asian nations have had to intervene to halt the local currency from strengthening, resulting in a sharp rise in foreign exchange reserves and an increase in local currency liquidity that needs to be sterilized by central banks, Muto said. That's hurt central banks' balance sheets, he said. Meanwhile, capital inflows have resulted in excess liquidity that's pushed up prices of assets such as real estate and shares, and that "could threaten price stability in the long term," the deputy BOJ governor said. To deal with huge capital flows Asia needs to develop a better regional bond market, but much work is still needed, Muto said. Asia's financial integration also lags that of other regions such as the European Union, he said. Muto said that authorities need to watch out for a resurgence in protectionism, including in the U.S., that comes as a result of Asia's economic development. He noted that some developed countries are also beginning to worry that so-called sovereign wealth funds, which use foreign exchange reserves as funds, could buy out important companies and financial institutions.