Emerging Asian neighbors are bracing for a surge in capital flows after Japan's unprecedented bid to pump up its long-moribund economy but most believe the upside of cheap cash and a stronger Japanese economy outweighs the risks.
The Bank of Japan stunned global markets last month with its plan to release some $1.4 trillion to end nearly two decades of stagnation and deflation, adding to the wave of quantitative easing stimulus already unleashed by central banks including the U.S. Federal Reserve and the Bank of England.
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"We have to be wary of the building up of the asset bubbles. Inflationary pressures are on a bit of an uptick," Rajat Nag, Managing Director General of the Asian Development Bank, said during its annual meeting on the outskirts of New Delhi.
While others including Bank of Japan Governor Haruhiko Kuroda said they would be on the lookout for signs of unintended spillovers on emerging economies, many hope that the benefits of increased Japanese consumption outweigh the risks of asset bubbles, inflation and the competitive impact of a weaker yen.
They also said Asia would gain from investment by Japanese companies and in infrastructure that would result from Prime Minister Shinzo Abe's economic program, known as "Abenomics," but stressed the need to monitor capital flows to pre-empt risks to financial and economic stability.
Thailand, for example, is worried that its export-oriented economy could be hurt by strength in the baht currency as a result of higher inflows.
"When it was as strong as it was a couple of weeks ago, I have all the reasons to be worried," Thai Finance Minister Kittiratt Na-Ranon said of the baht.
Kittiratt, however, resists capital controls to manage flows. Instead, he said Thailand could look to lower interest rates -- which the central bank opposes -- and work with neighboring countries to use inflows to help fund projects that depend on imported goods.
The Philippines also faces upward pressure on its currency after Standard & Poor's raised its credit rating to investment grade. Japanese institutions, however, account for just 2.8 percent of Philippines stocks and bonds.
The Philippines has avoided capital controls and has looked to manage flows by giving easier access to foreign exchange in the banking system and retiring some of its external debt.
Central bank Governor Amando Tetangco said ultra-low interest rates in developed economies mean policymakers will have to rely increasingly on non-conventional means and absorb capital flows through investment in the real economy.
"Interest rate policy is no longer sufficient," Tetangco said. "You will have to use other tools."
PREVIOUS CRISIS WEIGHS
The 1997 currency crisis that led to economic collapse in several Asian countries means policymakers are sensitive to the risks of volatile fund flows.
"I understand that there are various concerns about effects Japan's monetary policy could cause overseas," Japanese Finance Minister Taro Aso said, adding that he had not heard of any such concerns directly from other countries.
India, for example, has been able to finance a current account deficit that ballooned to a record 6.7 percent of GDP at the end of December thanks to robust portfolio inflows, making it vulnerable if the quantitative easing spigot is turned off.
"The global liquidity situation could quickly alter for EDEs (emerging and developing economies), including India," Reserve Bank of India Governor Duvvuri Subbarao said in his monetary policy statement on Friday in Mumbai.
"With quantitative easing, (advanced economy) central banks are in uncharted territory with considerable uncertainty about the trajectory of recovery and the calibration of QE," he said.
Paul Sheard, chief global economist at Standard and Poor's, said the Bank of Japan's move is "long overdue."
"If Japan comes out of deflation and if the broader agenda of Abenomics is successful, raising the potential growth rate, restoring more animal spirits to the Japanese economy, that's good. It's good for Japan, it's good for the region and it's good for the world."
(Writing by Tony Munroe; Editing by Frank Jack Daniel and Sanjeev Miglani)