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Capital Inflows to Emerging Countries and Their Reflux to the United States

January 2011
Shun Kobayashi, Koichi Yoshino
Financial Markets Department

Under the prolonged accommodative financial environment in developed countries, incentives to search for yield have increased among investors. This has prompted capital inflows to emerging countries with high growth prospects (high expected returns) in recent years. In these circumstances, the correlation coefficients of changes in asset prices among emerging countries have reached an unprecedentedly high level, reducing the benefits of internationally diversified investment. Concurrently, many of the emerging countries, faced with a significant amount of capital inflows, appear to be intervening massively in the foreign exchange market to keep their currencies from appreciating sharply. The accumulated foreign reserves resulting from the interventions have tended recently to be invested increasingly in longer-term U.S. Treasuries, and it is possible that this tendency is putting downward pressure on U.S. long-term interest rates. The decline in these rates may cause an acceleration of capital inflows to the emerging countries by further encouraging investors to search for yield. The recent international capital flows suggest that a "feedback loop" is operating between developed and emerging countries, and therefore careful attention should be paid to future developments, including the possibility of a reversal of capital flows.


Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2011-E-1, is a translation of the original Japanese issue, Bank of Japan Review Paper No. 2010-J-22, published in December 2010. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

If you have comments, questions, or requests for hard copies, please contact Takuji Kawamoto, Financial Markets Analysis Group, Coordination and Market Analysis Division, Financial Markets Department (Tel: +81-3-3279-1111 [ex. 2713]).