Nothing new on Japan withdrawal symptoms

PUBLISHED : Saturday, 05 June, 1999, 12:00am
UPDATED : Saturday, 05 June, 1999, 12:00am

The recent survey of international lending by the Bank for International Settlements (BIS) once again highlights a reported big pull-out from Asia by Japanese banks.

Let us dispense with one misunderstanding immediately. The decline from US$76.2 billion to $38.6 billion in Japanese bank exposure to Hong Kong last year need give us no worries. The money went in and it went straight out again. We were a booking centre only.

But the figures should also be seen from the Japanese perspective, and this shows some interesting trends.

Yes, it is true that the external assets of banks in Japan, including foreign banks, declined last year. So did their external liabilities. When you balance it all out to get net external assets, which is what really counts, you find there has been little change.

Those net external assets were 30 trillion yen (about HK$1.91 trillion) in March. One year before they were 29 trillion yen and that happens to be the average figure of the past five years.

Where the change has come is in their composition. Those denominated in yen have fallen to 16.2 trillion from 33.5 trillion at the end of 1997, while those denominated in foreign currency have risen to 14.2 trillion yen from a negative position before December, 1997.

In other words, banks in Japan have only recently become net lenders in foreign currencies. Previously they were net borrowers.

It all reflects what happened in the Asian financial crisis which broke out in mid-1997, and Thailand provides the best example of it.

The Bank of Thailand had adopted a doomed strategy of fixing the Thai baht to the US dollar, while allowing local interest rates to stand at up to 600 basis points above their US equivalents, and this brought a huge inflow of foreign loans.

It was entirely understandable. Thai borrowers had currency protection from their central bank and of course they then scorned Thai baht for cheaper foreign currency loans.

The result was that the net foreign liabilities of Thai commercial banks rose to the equivalent of 33 per cent of GDP with Japanese banks supplying much of this money through the Bangkok International Banking Facility.

Then came the crash, the currency guarantee failed and Thai borrowers scrambled to unwind their loan obligations, with the result that the latest figures show those net foreign liabilities at only 9.4 per cent of GDP.

If this is a Japanese pull-out then it reflects a welcome rather than an unwelcome trend. It tells us the balance of payments deficits of Asian countries are being unwound.

Much of that original lending was reported as yen denominated in Japan, which is why those external assets in yen are now declining so rapidly.

But Japanese banks are still active as middlemen in foreign-currency lending. They are still serving the foreign arms of their domestic customers, they still engage in trade financing and they appear to be increasing their sovereign loan exposure to the rest of Asia.

The BIS figures tell us nothing new. They reflect developments we already know have taken place. They are history, not current events.