The Bank of Japan's (BoJ) unprecedented monetary stimulus is increasingly being felt around Asia, with the central bank's liquidity set to provide an important buffer against the Federal Reserve's impending tightening, says HSBC.
"With inflation [in Japan] still far from target, we expect the BoJ to keep financial conditions extraordinarily loose for some time. Asia will increasingly feel the impact of Japanese capital," Izumi Devalier, economist at HSBC wrote in a report.
In April 2013, the central bank launched an aggressive easing program to pull the world's third largest economy out of two decades of deflation and sluggish growth. It has since been injecting $60-80 billion per month into the financial system via purchases of Japanese government bonds (JGBs) and risk assets.
The availability of cheap Japanese funding will rise in importance as the Fed takes monetary policy in the opposite direction of the BoJ, Devalier said.
The U.S. central bank has steadily scaled back its monthly asset purchases over the course of the year to $35 billion per month, down from a peak of $85 billion in 2013. It is expected to begin raising interest rates as early as the second quarter of next year.
"That evokes concerns of a sudden drought of liquidity in Asia, where aggressive easing by the Fed has increased the availability of dollar funding, encouraging portfolio flows from overseas investors," Devalier said.
"Fortunately, many Asian countries have beefed up their defenses over the past few quarters, rebuilding their FX reserves and adopting a cautious monetary stance, where necessary. The liquidity provided by the Bank of Japan will provide an additional buffer against the next wave of Fed tightening," she added.