Published Date: 12 July 2006

Remarks by Mr Heng Swee Keat, Managing Director, Monetary Authority of Singapore at theNomura Asia Equity Forum, 12 July 2006

"Japan-Asia Economic Cooperation - the Next Phase"


Ladies and Gentlemen,

Good afternoon. First, let me congratulate Nomura for organizing this very successful conference that brings together top CEOs from the region and prominent investors from around the world. 

Japan's role in Asia's economic development

2   The theme of my talk today is, "Japan-Asia Economic Cooperation - The Next Phase".  Both Japan and Asia are undergoing exciting changes. The transformational changes will re-shape the dynamics of the economic relationships in this region. 

3   Since the 1970s, Japan has played a key role in the region's economic development.  After the Plaza Accord in 1985, Japan became an even more prominent force behind East Asia's manufacturing and export-driven growth.  The sharp appreciation of the Yen drove Japanese manufacturers to invest heavily in East Asia.  They imparted technology and expertise and propelled the region's industrialization forward.  As the leader in the East Asian flying geese formation, Japan provided a strong lift to those following.

4   The region had also benefited from the direct aid and technical assistance from the Japanese government in developing infrastructure, healthcare and education.  Asia had consistently received the lion's share of Japan's Official Development Assistance (ODA), accounting for over 60% of such aid during the 1970s and 1980s.

5   Unfortunately, Japan's involvement in the region, especially in ASEAN, slowed in the 1990s.   Weaknesses in the domestic economy and excess capacity in the region following the Asian financial crisis forced many Japanese corporates to scale back their investment overseas. Beset by domestic problems, Japanese banks sharply pulled back lending activities in the region.  At their peak in the mid-1990s, Japanese banks' claims on East Asia accounted for 77% of their total overseas claims.  This ratio fell to 7% at the end of last year. 

Laying groundwork for deeper partnership

6   I am glad, however, that the conditions for Japan's renewed engagement with Asia have steadily improved in recent years, on the back of structural changes in both Japan and Asia. 

7   The Japanese economy has undergone significant restructuring.  Japanese banks have overhauled their balance sheets, while corporates have significantly trimmed excesses in debt, capacity and labour, and rebuilt the foundation for growth.  The Japanese economy is now growing at one of its fastest rates in a decade and the unemployment rate is at its lowest in eight years.

8   Likewise, since the Asian Crisis, the rest of Asia has also undertaken key structural reforms.  Many countries have enhanced financial supervision, improved corporate governance and liberalized their economies.  Corporate balance sheets and capacity utilisation have improved significantly. 

9   In the last 4-5 years, we are already seeing stronger engagements between Japan and East Asia.  Let me cite a few key facts:

a. first, Japan's imports from East Asia grew at an average rate of 12% each year, compared to 8% during the 1990s. Likewise, East Asia has become a more important market for Japan's exports.  East Asia now accounts for 47% of Japan's total exports, up from 40% five years ago. 

b. second, in fiscal year 2004/05, Japanese FDI into East Asia surged 46% to the highest level since the Asian financial crisis.  Within East Asia, Japanese FDI into ASEAN alone rose by 17% to US$2.7 billion.

c. third, Japanese business operations in East Asia, especially in ASEAN have been profitable.  According to a 2005 survey by the METI, Japanese operations in four ASEAN countries (Indonesia, Malaysia, Thailand and the Philippines) accounted for almost 50% of Japanese corporate profit growth in Asia ex-Japan , while China accounted for 29%.

The survey also revealed that Japanese corporates have continued to make large capital investments into these four ASEAN economies, even as investments into China expanded rapidly.  Anecdotally, Japanese corporates have expressed the intention to continue investing in ASEAN, even as they enlarge their presence in China .

A new phase in Japan-Asia cooperation

10   Going forward, the nature of the Japan-Asia economic relationship will continue to develop rapidly, against a backdrop of economic dynamism in the region. The recent developments give us a glimpse into the possibilities in the coming years.   I believe Japan and Asia are entering a new phase of deeper and broader partnership, with a few interesting features.   First, as trade and investment links between Japan and Asia intensify, these will extend to new destinations, especially Vietnam and India.   Second, Japan's manufacturing investments in the region have and will continue to move up the value chain.  Third, Japan and Asia's partnership has broadened beyond manufacturing to new areas in services, especially in financial services, including asset management.

11   These developments will driven by the private sector, seeking to exploit opportunities, and facilitated by governments in the region which see the value of deeper economic integration.   We will witness these developments across the whole of Asia, but let me just make a few remarks concerning ASEAN. 

12   The ASEAN Free Trade Area already provides for tariff-free access for manufacturing products.  ASEAN governments are now working towards the vision of an ASEAN Economic Community by 2020. This will create a single manufacturing base and a single market of over 560 million people. ASEAN's Free Trade Agreements with Japan, China, Korea and India will enable ASEAN to catalyse a deep web of inter-linkages all across Asia.   Japan is expected to implement a Comprehensive Economic Partnership Agreement with the ASEAN 6 by 2007 and the newer members by 2012. 

13   ASEAN's market of over 560 million people offers a growing consumer market, while the abundant raw materials, labour and high quality of production facilities provide Japanese investors an important avenue for risk diversification.   

14   Japanese firms which have operated successfully in ASEAN are not just setting up low-cost manufacturing plants in the region, but increasingly transferring higher value-added production and even entire product lines to ASEAN.  For example, through its Innovative International Multi-purpose Vehicles project, Toyota aims to increase the ASEAN content of its vehicles to 100%.  Japanese manufacturers are also establishing more R&D facilities in the region to take advantage of the experience and capabilities that have been built up over the years.

15   Beyond manufacturing, Japanese companies have broadened their investment to operational headquarters and services such as information technology and logistics.  For example, Asahi Breweries set up its regional sales headquarters in Bangkok while Sankyu established a $30 million distribution facility in 2003, its third in Singapore.   

16   All these developments present exciting opportunities for regional corporates.  Singapore can play a role in this development, by offering our deep connectivity to link Japanese companies to those in the region and beyond.  The Economic Development Board or EDB in Singapore is working to facilitate firms' operations in Singapore and in the region. Besides the 7000 companies from Japan, Europe and North America, over 1600 Chinese companies and 1200 Australian/New Zealand companies are based in Singapore.  Another 1600 Indian companies, including all the top 20 Indian IT companies are now present in Singapore working with their global partners. This dense network provides Japanese and other global companies many opportunities for collaboration across diverse industries.

17   The EDB is spearheading further efforts to deepen linkages with the region. The agreement to promote Economic Connectivity between Vietnam and Singapore is a good example.  A Joint Steering Committee with representatives from eight ministries in Vietnam and the EDB will study investment proposals and give Approval-in-Principle certification to the investing company.  This process will speed up investment approval in Vietnam.   In the last 2 years, 20 investment projects worth US$380 million have been facilitated this way. 

18   An example of such a collaborative project involves Zentek, a Japanese technology firm, which is working with Singaporean mobile handset design company, iWoW, and Vietnamese manufacturer, Vina-Mobi, to produce mobile phones for the Indo-China market.  This partnership makes use of the strengths of technology in Japan and Singapore, and the low-cost manufacturing capability and the big market in Indo China.

19   More recently, the Indonesian and Singapore Governments signed an agreement to establish Special Economic Zones or SEZ in Batam, Bintan and Karimun. The agreement outlines seven areas of cooperation, including investment, labour and finance and banking, to help these SEZs to become investor-friendly and cost-competitive manufacturing zones. This agreement is an important signal of the Indonesian Government's commitment in attracting global investments.

20   Japan has always been a major investor in Indonesia, and its continued involvement in the largest ASEAN economy is key for economic growth in the region. The Framework Agreement that has just been signed is an excellent opportunity for Japanese investors to work with the Singapore government to improve the investment climate in Indonesia.   Together, Japan and Singapore can help Indonesia attract more investments and return it to much needed higher growth rates.  And, as Indonesia grows, so will the entire region.

21   Beyond the region, Japanese companies are using Singapore as a base to tap into the Middle East. For instance, Meiden, a Japanese manufacturer of power equipment, uses Singapore as its regional headquarters to cover the Middle East, while Denso, a leading Japanese auto parts producer, upgraded its Singapore operations to reach into the Middle East.

Developments in Financial Services

22   The growing economic linkages between Japan and the rest of Asia including ASEAN will accelerate the pace of financial market integration.  Like the real economy linkages, financial linkages will be driven by the private sector, facilitated by governments.  The Japanese Government and the Bank of Japan have been particularly active in this effort.  Japan is a key advocate of the swap agreements under the Chiang Mai Initiative to promote greater regional financial stability.  Japan has also played a leading role in developing regional local currency bond markets through the Asian Bond Markets Initiative.  For example, the Japan Bank for International Co-operation launched a new guarantee facility under the ABMI intended for local currency-denominated corporate bonds issued by Japanese firms operating locally.

23   Asia has both ample liquidity as well as ample investment opportunities.  Efficient financial intermediation and the development and integration of financial markets are therefore critical for corporates to tap funding efficiently, and for investors to have access to a diversified set of investment opportunities.   There are encouraging signs.  The Asian REITS market continues to grow. A range of new equity and equity-linked products have been launched in Asia in the last one year. For example, Indian issuers have been active in driving the Asian convertible bond market, and new convertible bond deals from China, Singapore and Indonesia have raised a combined US$829 million in proceeds. For the first half of this year, Asian (ex-Japan) equity capital market underwriting reached record levels, totaling US$57 billion in proceeds from 351 issues.  Hong Kong, South Korea, India, Taiwan and Singapore have all seen significant issuance.  Japanese equity capital market activity has also seen the same record growths, and I am happy to note that Nomura continues to increase its market share and hold its rank at the top of the league tables in Japanese equity deals.

24   Financial institutions based in Singapore will continue to play a key role in spearheading some of these financial linkages, and in catalyzing innovation.   Indeed, there are many encouraging developments.

25   Japanese banks have been expanding their Asian operations.  Two of the three mega Japanese banks have located investment and corporate banking teams in Singapore, to cover the market in the region as well as India.  With the opportunities presented by infrastructure developments in the region, project finance teams have expanded in Singapore. 

26   Many innovative products are being offered out of Singapore. In the last few months, we saw the listing of our first stapled structure, first infrastructure fund as well as our first shipping trust.  Asian corporates can now also have access to global funds in Singapore through the newly introduced Global Depository Receipt (GDR) programme by the Singapore Exchange. Asia's REIT sector has grown rapidly and is now over US$40 billion.  Singapore's REITs continues to grow.  With 11 REITs worth a total market capitalization of more than US$8 billion, the Singapore REIT market has been held up as one of the more progressive REITs market in Asia ex-Japan. REITs have ventured beyond the traditional assets of office spaces, commercial buildings and retail shopping malls, to the hospitality and healthcare properties. 

27   The development of capital markets in the region go hand-in-hand with the presence of a large and diverse group of asset management players. Singapore is a leading asset management centre in the region, with global asset management firms, including those from Japan, the US and Europe establishing their presence in Singapore.

28   MAS conducts an annual survey of the asset management industry. I am pleased to announce the results of our latest   survey today.  The survey has again confirmed the robust performance of asset management activities in Singapore and underscored our major role in this important industry. Assets under management in Singapore recorded its fifth year of double-digit growth in 2005, expanding by 26% to S$720 billion, from S$572 billion the year before. The proportion of funds invested in Asia also increased and accounted for 53% of the total assets under management.   Over 80% of the assets managed by asset managers in Singapore are sourced outside of Singapore.  This attests to the international nature of the industry in Singapore.

29   The asset management industry has benefited from several key trends. These include: the rising wealth accumulation in Asia, strong global investor interest in the region's growth prospects, increasing pace of pension reform in Asia and diversification need of investors in other parts of the world, including the Middle East. 

30   On the Middle East, I am pleased to highlight that our fund managers registered a 30% increase in funds sourced from the Middle East in 2005.  With the changes that we have made recently to our regulatory and tax regime, financial institutions in Singapore are increasing their range of financial products to cater to Middle East investors, including Shari'ah compliant products. These are positive developments that will deepen the economic relationship between the Middle East and Asia.

31   In 2005, we saw around 80 new asset management companies set up in Singapore, bringing the total number of asset managers to date to 384. In line with global trends, we also saw strong growth and development in the alternative fund management industry.


32   I have outlined how Japan's relations with Asia have evolved. The deepening and broadening relations between Japan and Asia mean more opportunities for investment and growth. Asian economies are increasingly linked by freer and more abundant exchange of goods and services, human capital and investments, and financial flows.

33   As the partnership between Japan and Asia enters a new phase, the opportunities for mutual benefit and prosperity have expanded. Singapore is pleased to be Japan's partner in reaching out to this region of vast opportunities, through our deep linkages throughout Asia and to the Middle East, and our role as an international financial centre. As Japan's partnership with the region enters a new phase, Japan's collaboration with Singapore will deepen as well.

34   I wish you a fruitful time during the rest of the conference. Thank you.