Capital Flight in Japan Dressed Up as Foreign Direct Investments

Last year I wrote: (I removed the footnote and replaced it with a link)

ASEAN and the Philippines will likely become beneficiaries of BoJ’s inflationism

The foremost reason why many Japanese may invest in the Philippines under the cover of “the least problematic” technically represents euphemism for capital fleeing Japan because of devaluation policies—capital flight!

Capital flight will be masqueraded with technical terminologies of portfolio flows and Foreign Direct Investments (FDIs)

Bingo! 

The latest external investments data from Japan, from the Wall Street Journal: (bold mine)

The total value of foreign direct investment by Japanese companies rose 35% from a year earlier to a record ¥13.248 trillion ($130 billion) during 2013, according to data released by the Ministry of Finance Tuesday.

Unfazed by a sharp decline in the yen’s value that makes foreign ventures more expensive, Japanese companies sharply expanded their investments in the world’s major markets, including Southeast Asia, the U.S. and the European Union.

One notable exception was China, where the amount of Japanese FDI shrank by 18% to ¥887 billion, the first decline in three years. The drop signals that as bilateral tensions continue to soar over a territorial dispute, Japanese companies are growing more cautious about business prospects in China after pouring money into its fast-growing economy for years. Corporate executives have said rising production costs and a slowdown in domestic demand in China are also worrisome.

In contrast, companies showed strong appetite for expanding operations in other Asian markets, such as Thailand and the Philippines. The amount of new FDI in the member countries of the Association of Southeast Asian Nations rose to ¥2.33 trillion, nearly triple the previous year’s level and sharply higher than the previous record of ¥1.55 trillion reported in 2011.

The above further confirms my predictions in 2012

The bottom line is that YES we should expect Japanese FDI and portfolio investments into the Philippines and the region to swell.

But since (inward) capital flows into ASEAN will reflect on global central bank activities, this dynamic would not be limited to Japan but would likely include western economies as well.

(bold added) 

Oh while this looks positive on the surface, the question is in what areas have the Japanese been investing at? Have these monies been channeled into the bubble sectors?  

For the Philippines as I explained here, restrictions on FDI’s  have increased since October 2012.  Liberalization has been limited to bubble areas such as large retailers and casinos. And as I also pointed out the January 2014 data confirms that FDIs have flowed into these sectors.

The recent BoJ impelled FDI’s flows have an uncanny resemblance to pre-Asian crisis conditions

Again as I also noted in 2012

Today’s FDI flows eerily resonates or resembles on the time window of the 1985 Plaza Accord to the post Japan bubble in 1990s until the climax, the 1997 Asian Crisis.

The Business Insider quotes author and former Deputy Chief of the Hong Kong Monetary Authority Andrew Sheng in the latter’s book From Asian to Global Financial Crisis

… shift production to countries that not only welcomes Japanese FDI but also had cheap land and labour… By the late 1980s, Japan had become the single largest source of FDI for the fast-growing emerging Asian economies. This trend was particularly clear when another surge of Japanese FDI into Asia took place between 1993 and 1997, with Japanese FDI rising nearly twofold from US$6.5 billion to US$ 11.1 billion during this period…

… banks followed their manufacturing customers into non-Japan Asia in earnest… From 1985 to 1997 Japanese banks supplied over 40 percent of the total outstanding international bank lending to Asia in general… The massive expansion in Japanese bank lending, in both yen and foreign currency, created huge capital flows globally.”

So could we be experiencing a déjà vu, Asian Crisis 2.0?

To repeat déjà vu, Asian Crisis 2.0 courtesy of Abenomics? [updated to add Again the main culprit here are the national central banks, Abenomics serves as an aggravating factor]