Too Much Of A Good Thing
For emerging markets there is a steady flow of cash, but soon that could turn into a flood. The Bank of Japan’s huge stimulus program could cause the nation’s investors to pursue high returns, but for some developing countries, that may prove to be too much of a good thing. Rationale behind this is that a big increase in foreign money would “overheat” those markets and push currencies even higher. As a result, a country’s exports become more expensive, while importing cheaper goods which could hurt domestic producers.
Investors around the world were already loading up on bonds from places such as Mexico and Russia even before the Bank of Japan announced its $1.4 trillion stimulus plan to end stagnation. So far, there has been a 15 percent drop in the value of the yen and a 28 percent increase in Japanese stocks which has caused some investors to back home cash, but analysts are saying Japan will continue to seek foreign assets because of the low yields of 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.” In addition, strategists at Bank of America recently told their clients that “Emerging markets, with their strong growth rates and high interest rates, “may attract a significant portion of these savings,”.
Written by Kevin Zhang