13 Asian nations to make local financing easier
TOKYO -- Japan, China, South Korea, and 10 members of the Association of Southeast Asian Nations will create a financing mechanism allowing their banks to procure local currency by putting up sovereign bonds as collateral.
Finance ministers and central bankers from the 13 nations will take up the issue early next month at a gathering timed with the Asian Development Bank's annual meeting in Baku, Azerbaijan. A joint communique is expected to spell out the details.
The program will facilitate the delivery of funds in local currency against the collateral of sovereign bonds. For instance, Japanese banks could offer local banks Japanese government bonds as collateral in exchange for local currency. Japanese banks, awash with JGBs, can make better use of the assets while diversifying procurement sources for local currency.
This could be good news for smaller enterprises, which often run into difficulty obtaining financing from banks abroad. Japanese banks could instead offer local-currency loans when these businesses venture into foreign markets.
The program will first be implemented bilaterally and eventually extended to the other countries. Japan is expected to launch bilateral arrangements with Singapore and the Philippines as early as 2018. All 13 countries will have access in 2020 at the earliest.
Japan now has a similar setup with Thailand and Singapore, where JGBs can be deposited at the central banks for procurement of local currency. But such transactions generally carry higher interest rates, confining their use to natural disasters and other emergencies.
For the program to work seamlessly, central banks will need to link one another's settlement systems, creating a mechanism allowing for simultaneous exchange of sovereign bonds and local currency.
At the upcoming meeting, the 13 countries are expected to agree on sharing such information as transaction dates, funds and underlying government bonds. Sovereign bonds will be assigned identification numbers to make their cross-border management easier.
Japanese direct investment in the rest of Asia jumped 50% on the year to nearly 4 trillion yen ($32.9 billion) in 2013 and remained high in 2014.