ABSTRACT
Over the 2000s and 2010s, Asian economies have been confronted with multiple challenges and shocks from the global financial crisis of 2007–2008, the European sovereign debt and banking crisis, and the subsequent unconventional monetary policy by developed economies such as the US, Europe, and Japan. The unconventional monetary policy and the ultra-low interest rates in developed economies have sent international capital flowing into Asian equities, government bonds, and housing markets to search for higher yields. The better growth prospects and improved balance sheets and policy performance in many emerging market economies are major factors attracting the inflows (Checki 2013). However, like many emerging economies, financial markets in Asia are relatively small in size. This results in artificially inflated equity prices and house prices and lower yields of government bonds, which creates external financial vulnerability and financial stability concerns. Subsequently, Asia’s asset prices are influenced more strongly by developed economies’ policies rather than by the countries’ own monetary policies and economic fundamentals. As a result, the surge in international capital flows complicates macroeconomic management of the authorities. It also creates macroeconomic imbalances by generating local currency overvaluation, which has eroded the comparative price advantage. And due to the typically underdeveloped capital markets, companies have limited options to hedge exchange rate risks. In addition, the US dollar-denominated debt has been increasing gradually in Asia since the cost of borrowing money in developed economies became cheaper.
