Written by Bhaturaja Murugabhupathi and Gaurav Dogra
(Reuters) – Asia’s foreign exchange reserves have fallen this year as central banks intervene to support their currencies, with Japan, Indonesia and South Korea leading the declines.
Foreign reserves in 12 countries, from Japan to India, fell by about $50 billion to $7.5 trillion by the end of June. They had risen 2.2% in the same period last year.
Foreign investor inflows into Asian bonds fell 34% in the first half of this year compared with last year, data from exchanges and bond market associations showed.
Although the decline in reserves is not severe enough to cause a financial crisis or cause countries to struggle to pay for imports, since most have healthier balance sheets and controlled external liabilities, analysts note that it could still weigh on investor sentiment and lead to outflows from investment portfolios.
Import coverage ratios, which measure the number of months a country could continue importing if all other flows stopped, have risen for India, South Korea and China this year, but have fallen for countries such as Malaysia, Indonesia and Thailand, according to Reuters calculations.
Asian currencies fell sharply in the first half of the year as the dollar was supported by a hawkish Federal Reserve and higher yields. The yen was the region’s biggest loser, falling about 11% against the dollar, prompting the central bank to launch several suspected rounds of interventions to support the currency this year.
Meanwhile, Indonesia’s central bank raised interest rates in April to curb the rupiah’s slide and prevent capital outflows.
With major events such as the US election and potential shifts in the Federal Reserve’s monetary policy this year, regional currencies are expected to see increased volatility in the second half.
“When the US Federal Reserve eventually starts cutting interest rates, which could cause a temporary decline in the value of the dollar, the credibility of Asian central banks will be tested,” said Saurav Sen, senior analyst at Jamie Credit.
“Countries that have the ability to increase their reserves at that time to keep their currencies competitive against the dollar will be able to manage the volatility. These countries include China and India,” Sen said.
Bucking the trend, India’s foreign exchange reserves rose 4.9% to $653.71 billion in the first half of the year.