Source of Liquidity: Japan and the US

Many observers continue to see the US as the main source of capital flowing into the emerging markets, prompting several to impose capital controls of various kinds. The September capital and current account data reported earlier today underscores our difficulty with the popular narrative.

The MOF reported that Japanese investors purchases JPY3.18 trillion (~$39.5 bln)of foreign assets in Sept. Japan's current account surplus stood at JPY1.95 trillion. As we have noted previously, Japanese investors have exported large sums of capital in absolute terms and relative to its current account surplus. In the three months through Sept, Japanese investors have exported JPY14.02 trillion. That means they have bought about about $173.8 bln of foreign bonds (primarily) and stocks.

The US portfolio flow data, picked up in the TIC report, is currently available through Aug. In the three month through August, the TIC report show Americans bought a net $10 bln of foreign bonds and stocks. In that same three month period Japanese investors bought $181.4 bln of foreign stocks and bonds. In fact, in that three month period, Japanese investors bought more than twice what American bought in the entire first eight months of the year (~$80 bln).

As an aside, Japan reported that China was a net seller of Japanese debt instruments for the second consecutive month. After selling a record JPY2.02 trillion in Aug, Chinese investors sold another JPY769 bln of Japanese paper in Sept--mostly bills, but also some bonds). The Chinese sales in Aug and Sept more than offsets the total net purchases in the first seven months that appeared to cause some consternation among some Japanese policy makers.

It is possible, even reasonable to suspect that Chinese purchases may be concealed by using financial centers, like London and even Hong Kong. In Aug and Sept as the Chinese appeared to be sellers of Japanese debt, London bought JPY8 trillion and Hong Kong bought JPY5 trillion. This is not to imply that London and Hong Kong purchases reflect Chinese demand, but rather that there is still a great deal of uncertainty over what is really taking place on a country specific level. The overall point that Japan is a much larger source of demand for foreign assets than the US remains valid.