Japan

This post is part of a series from Asia Unbound. The post is authored by Nobumasa Akiyama, a professor of International Politics in the School of International and Public Policy at Hitotsubashi University.  Contemporary international society has been built upon globalization, which is driven by the quantitative, qualitative, and temporal acceleration of the borderless flow of people, goods, money, and information. Though it is usually seen as beneficial, the spread of COVID-19 has revealed its risks. It took only a few months after the first case was reported in Wuhan, China for the world to reach a crisis point with more than 100,000 deaths worldwide, and the breakdown of the globalized supply chain has also negatively affected economies around the world. While the world plunged into this emergency, medieval-style battles for procuring ventilators and personal protective equipment erupted. Right or wrong, an idealistic notion that a crisis of global scale should be dealt with through international cooperation rings hollow in a situation where the very nature of the sovereign state is exposed in this way. Ultimately, a nation pursues its own national interests first and foremost (such as in the pursuit of “America First”) and its people prioritize their own safety and security above cooperation with others. COVID-19 has brought to light how fragile international cooperation was. The power of the sovereign state grows. The movement of people and goods will probably be stagnant for some time to come. However, in the longer term, as the threat perception of pandemic is fading, there will be a resurgence of globalization driven by the flow of information and finance, as well as technology including big data, AI, and robotics, which would provide more resilience within societies against pandemics. The question is under what principles will global governance in the post-Corona era come to exist? Instead of seeing the current crisis as a battle between authoritarianism and liberal democracy, perhaps a better frame is to consider how governance must evolve to meet the reality of a far more vulnerable world. This pandemic has revealed the need for a serious conversation on how to protect individual rights even as governments seek to manage and trace the behavior of people for the sake of the public health. New technologies, especially information technology and data science, offer governments new tools, but these technologies must be used in service to democratic norms and principles. In the fight against COVID-19, societies across the globe are on the verge of losing many core liberal values. People have lost their serenity, and society’s moral values, such as mobility among social classes, tolerance of racial diversity, or fairness are being challenged. Among them, individual rights may well be the biggest casualty in this fight. People have allowed their rights to be somewhat curtailed or their privacy to be compromised by the government or others in exchange for safety. China’s responses to COVID-19 so far seem to have demonstrated the willingness of a population to conform to an authoritarian regime as a means of achieving social resilience and managing the public health crisis. This is where China’s pandemic response has been worrisome to many in the international community. As the World Health Organization emphasized, contact tracing is an important element of the fight against COVID-19. In many countries, people’s health information is collected, analyzed and held by the government or certain companies on the grounds of managing the crisis.  Based on analysis of that data, the healthy and unhealthy are identified, with the former allowed freedom of action and the latter being subjected to mandatory segregation and restrictions on behavior.  The “Green Code” in Wuhan is one of the first social implementations of such an application of bio-surveillance. The “Green Code” is a de facto travel permit by bio-surveillance, and it is generated by an application from internet giants Alibaba Group Holding and Tencent Holdings based on basic information about a user’s travel history and health, as well as data on the people they come into contact with.  China’s exhaustive measures against COVID-19 reveal that the future of the bio-surveillance society is not a pipe dream. To be sure, this novel coronavirus has also prompted citizens in a variety of democracies to value their safety over personal freedoms. To varying degrees, citizens were asked to give up their right to privacy for the sake of public health, and the success of some is attributed to how technology was used to share personal data with the government. The South Korean government mandated that all those who were confirmed as infected by the virus were tracked by an app on their mobile phone as well as by their credit card use. Phones and credit cards were tagged to national identity numbers, and all information was made available on the website of national health authorities.  Other countries, including Taiwan and Singapore, adopted similar mechanisms to contain the spread of infection. Taiwan, which has so far been the most successful in containing COVID-19, has been extensively utilizing data and information technology to manage the public health crisis. In addition, many countries have closed their borders. As the global economy begins to recover, however, it will be necessary to manage the risk of spreading COVID-19 while allowing for international travel. As a means of resolving this dilemma, the idea of a global health authentication system, or an “immunity passport,” is being floated. However, such a system would mean sharing personal health data with many governments, including those that might not be respectful of privacy or civil rights. Currently, Japan has taken a different approach, one that has been far less intrusive into personal privacy rights. Although the government of Japan declared a state of emergency, social distancing has been urged rather than enforced. Cooperation by Japanese citizens is voluntary, and there has been no effort to monitor citizen behavior via smartphones or other technology. Indeed, the Japanese government seemed very aware of the need to temper the restriction of civil rights and economic activity during this public health crisis. Legally and politically, there is no appetite in Japan for any mandatory enforcement of government personal data policy. This has long been the case. For example, the government’s efforts to establish a national identity system for social security and tax purposes, the My Number system, has only been accepted by 14 percent of the population. It is unlikely that Japanese citizens would accept a policy that allowed their government to track their behavior on their smartphones. Now the liberal order is at the crossroads, Japan must address the standardization of personal data management and sharing if it is to continue to embrace a globalized world. Leaders in Tokyo must thus consider how to translate their own experience at home during the COVID-19 crisis into a global agenda for health data sharing. In the post-COVID world, it will become far more difficult to discern what the trade-off will be between safety and rights, and yet the Japanese people would want to avoid a governance model based on data surveillance. If compromising democratic values at home was anathema, then compromising rights abroad will also be problematic.   International rules and mechanisms for the storage and management of data (especially biometric data/bio information) that respect the rights of individuals are sorely needed. At the G-20 Summit in Osaka in June 2019, Prime Minister Shinzo Abe urged governments to begin to work together to build an overarching framework for promoting digital economy and securing the flow of data across national borders. He underscored the concept of building trust in the free flow of data, and to accomplish this, proposed rules for enhanced data protection.   Japan has been criticized in the past for building systems that only apply to the realities in Japan. Now is the time to consider whether the COVID-19 response offers insight into how democratic values can be respected even as governments attempt to collect data necessary for the public health. Reconsidering how the “Osaka Track” proposal could help to establish rules and mechanisms that would facilitate international cooperation for proper use of biometric data/bio information in pandemic management would serve our health needs. Beyond that, however, it would begin to build a framework for governance that will take into consideration safety and resilience as well as individual rights and welfare, with the spirit of liberal internationalism in the twenty-first century that suits the challenges of our era.

The coronavirus pandemic is slowing global commerce to a crawl, but many of the world’s largest economies are taking extraordinary actions to propel them through the crisis.

Prime Minister Abe today announced that he was placing seven regions of Japan, Tokyo and its neighboring prefectures of Saitama, Kanagawa, and Chiba, as well as Osaka, Hyogo, and Fukuoka under a state of emergency to cope with the accelerating spread of COVID-19 cases. For the early months of the epidemic, Japan’s numbers remained remarkably low, aligning more with Singapore, South Korea and Taiwan than with Europe and the United States. But recent rising numbers of confirmed coronavirus cases prompted Abe to take a different tack.   Three months have passed since news from Wuhan alerted Japanese policymakers to the possibility of a new infectious disease.  Early on, Japanese officials had to rely on their public health expertise for a policy response, and like elsewhere in Asia much of the initial discussion built upon experience with SARS and the H1N1 influenza response.  But the arrival of the corona virus to Japan was shaped by two factors.  The first was the docking of the cruise ship, Diamond Princess, in Yokohama.  With 3,711 passengers and crew aboard the ship, its first passenger identified as having the corona virus tested positive in Hong Kong on February 1. Japanese authorities quarantined the ship, and over those two weeks, over seven hundred passengers were identified as having the virus.  By February 17, the United States and other governments had reached agreements with Japan to bring their citizens on the ship home.  Those who were not sick were allowed to disembark and go home, while some chose to be treated in Japanese medical facilities.  The bulk of Japan’s February COVID-19 cases thus overwhelmingly reflected those aboard the Diamond Princess. A second factor that shaped Japan’s response was its complex relationship with China, the site of the original outbreak.  Early Japanese cases of corona virus detected in January had all traveled to Wuhan, China.  China’s lockdown of Hubei province had an immediate effect on Japanese manufacturers who rely heavily on China for their supply chain.  Equally problematic was the disruption to Chinese tourism to Japan.  In 2019, Chinese tourists made up 30 percent of the monthly foreign visitors to Japan, a considerable contribution to the Japanese economy.  On January 31, the Abe Cabinet announced that it would bar entry to Japan for travelers from Hubei province. And there were diplomatic sensitivities at play as well.  In April, President Xi was due to arrive in Japan for his first state visit, the culmination of years of diplomatic effort by Tokyo and Beijing to recover from their territorial dispute of 2012.  Finally, like China, Europe and the United States, Japan had much at stake economically in getting its public health response right.  By the end of 2019, Japan’s economy was sluggish as a result of the new consumption tax hike, with an annual real growth rate of 0.7 percent and a 1.8 percent contraction in the fourth quarter.  The initial impact of the pandemic was largely felt in the tourism sector. In January, visitors were down only by 1.1 percent year over year, but in February that dropped to 58.3 percent.  On March 9, the Japanese government restricted travel from all of China and from South Korea, and on March 21 added multiple countries from Europe.  By the end of March, Tokyo announced restrictions on travel from thirteen more countries, including the United States. But the real economic worry was the possibility that the 2020 Tokyo Olympics, scheduled to begin in July, would be canceled.  As concern grew about the idea of holding a massive international sports event in the midst of a global COVID-19 outbreak, the Abe Cabinet wanted to avoid the loss of significant investment made by the government and the private sector in preparation for the Olympic and Paralympic games.  Moreover, the economic boost to Japan’s economy of hosting the games could not be ignored. Tickets had been booked, hotels had been reserved, and a whole host of accompanying activities, including lucrative broadcasting rights, had been contracted.  240 billion yen was estimated in income from tourism alone. After weeks of difficult negotiation, the IOC and the Japanese government announced that they would be postponing the games until July of 2021.  Ultimately, the efficacy of Japan’s public health strategy—as with the strategies of other governments around the world—will be judged in terms of the lives saved. Abe surprised many on February 27 when he shut down Japan's schools, and urged that large gatherings be cancelled. The Emperor set the tone by canceling his birthday celebration on February 17. The Japanese government has put in place a new law that raises the level of national urgency for managing the public health crisis. Three factors prompted this shift.  First, medical experts began to see evidence that their initial cluster strategy, identifying those infected early on and finding out who had contact with them, would be insufficient for the rising community transmission numbers in densely populated urban centers.  Very early cases could be seen as falling into two groupings:  early cases of COVID-19 infection discovered in January among those who had traveled to Wuhan and in February, the passengers aboard the Diamond Princess cruise ship quarantined in Yokohama.   But then cases of community transmission began to shape the Ministry of Health, Labor and Welfare’s assessment.  In Hokkaido, after an initial case on January 28, small clusters began to develop on February 14, many of which could not be traced back to previous cases.  In Tokyo, a taxi driver with no travel to China or contact with cruise ship passengers was the origin of another cluster.  By mid-March, the numbers began to climb. Second, Japan’s initial public health response was predicated on the Special Measures Law for Pandemic Influenza and New Infectious Diseases and the Abe Cabinet determined it needed new authorities designed for the COVID-19 epidemic. In March, an amendment to that Special Measures Law regarding COVID-19 was passed to increase the options available to the prime minister. What may have seemed like a smart initial strategy in Japan to contain the virus has like elsewhere proven insufficient in a global pandemic.  Mitigation of its impact is now the Abe Cabinet’s goal. The prime minister’s decision to put Japan on a national emergency footing will allow the national government to mobilize its resources, including the Self Defense Force, to help tend to the sick. There is no expanded authority for local government, however.  The division of labor between national and local authorities on the coronavirus has been much debated, especially in recent weeks as Tokyo Governor Yuriko Koike has grappled with a rapidly growing number of cases. Here the contrast between Hokkaido and Tokyo is noteworthy.  Hokkaido Governor Naomichi Suzuki imposed a state of emergency from February 28-March 19 for his prefecture after a daily rise of 17 new patients in mid-February marked a significant cluster of corona spread.  The governor’s declaration carried no legal weight, and caused considerable consternation for downtown Sapporo businesses.  Nonetheless, in a region popular with domestic and foreign tourists in the winter ski season, the governor acted independent of the national government to stem the spread of COVID-19.  On March 18, Suzuki lifted the emergency status while cautioning residents to remain vigilant. Tokyo Governor Yuriko Koike’s recent effort to persuade Tokyoites to stay home was far more difficult.  By mid-March, Japan’s daily numbers had increased at an alarming pace, mostly in the nation’s capital:  from 90 on March 15, to 138 on March 22, and to 521 on March 31. In a press conference on March 26, Governor Koike implored the city’s 13 million residents to stay at home over the weekend, and then again the following Monday, to stay home during the work week also. The Tokyo Metropolitan Government also began to take steps to ensure that an adequate number of hospital beds, especially in intensive care units, would be available. Like New York, new facilities for corona virus patients are being set up in hotels, in sports arenas and other public space.  By the end of April 6, the Ministry of Health, Labor and Welfare reported 3,906 cases of COVID-19 in Japan with 80 deaths attributed to the virus. Thirty-one percent of those cases were in Tokyo. Criticism within Japan of the government’s response has come from various quarters.  Early disapproval of the handling of the Diamond Princess came from medical professionals outside the government. Iwata Kentaro, a medical doctor with expertise on infectious diseases who had worked on the Ebola epidemic, took to YouTube on February 18 to report on the mistakes being made onboard the ship.  Others were unhappy with the way in which foreign citizens were treated as they were evacuated, and the U.S. government for example took some heat for the way in which it merged infected and non-infected cruise passengers on return flights to the U.S.  In the Diet, opposition lawmakers were also concerned about the Abe Cabinet’s response, demanding more information about the data and analysis that underpinned government decision-making.  Prime Minister Abe met with leaders of Japan’s political parties, starting first with Yamaguchi Natsuo of the Komeito, the LDP’s coalition partner, and asked for their cooperation in drafting a new law for COVID-19.  For the most part, opposition party members supported a stronger national response but differed on whether a new law was needed to move forward with declaring a national emergency.  Finally, even after the new law passed the Diet, the ambiguity of whether and when the prime minister would announce a national emergency began to chafe, as did repeated press conferences by Koike that stopped short of imposing curfews or other measures to compel Tokyoites to stay home. Former Minister of Health, Labor and Welfare and former governor of Tokyo, Masuzoe Yōichi became an outspoken critic of both the Abe Cabinet and Governor Koike, attracting a wide following to his daily Twitter brief on global responses to COVID-19 and his urging for more stringent controls on Japanese behavior. For all of these criticisms, however, Japan’s numbers still lag far behind those of Europe and the U.S.  Yet the fear is that in the weeks and months to come, Japan too could see its urban population centers broadly infected and its hospitals overwhelmed.  Abe and Japan’s governors must balance the expertise and capacity of their medical experts with the real challenge of controlling the behavior of their citizens, the tens of millions in Tokyo—and the 120 million who live across the country.  COVID-19 will be particularly harsh given Japan’s demographics; twenty-five percent of its population are over the age of sixty-five.  The longer-term impact of the corona virus could be especially difficult for a deeply globalized Japan. The sluggishness of Japan’s economic growth makes it difficult to imagine an easy or quick recovery should the global economic recovery be weak.  The stimulus package under consideration will deepen Japan’s national debt, already at least twice the size of the national economy.  Complex geopolitical currents were already challenging Japan’s strategic interests. Tokyo will become deeply enmeshed should there be further deterioration in the relationship between the U.S. and PRC.  And coping at home with the social and economic consequences of Japan’s aging population will become much harder in the face of the corona virus. While universal health care provides a sound foundation for managing the disease, insufficient health care facilities and personnel have already been targeted for an overhaul, especially in an around Tokyo. Undoubtedly, there will be heroes and there will be demons in Japan’s coronavirus story, but it is too early to tell how Abe will be cast, or how the reputation of Japan’s bureaucrats will fare. Last week, the prime minister was chastened for what seemed to be ineffectual and token responses to the crisis:  his decision to send two masks to each Japanese household, a policy dubbed as “Abenomask,” and to offer discount coupons for the purchase of beef and fish.  Today, however, Abe marshaled far more government muscle to the effort.  At a minimum, the coronavirus has rewritten the widely accepted political script for Abe’s 2020.  No Olympics, no jumpstart to Japan’s economic growth, and no triumphant electoral wave for Abe’s party, the LDP.  Now it will be the success or failure of the management of COVID-19 that will be Abe's legacy. He must do all that he can to avoid having Tokyo and other cities in Japan share the fate of northern Italy and New York.  Like every other national leader, Abe must live with the numbers that make this crisis beyond the scale of any other.

Asia’s life insurers likely hold somewhere between $1.5 trillion and $2 trillion of foreign currency denominated bonds as part of their portfolio—mostly dollar denominated, but some in euros. Japanese lifers report 10 trillion yen (~ $900b) in foreign securities (25 percent of their portfolio). Taiwan’s lifers, counting their holdings of ETFs that are listed in Taiwan but invest abroad, are heading toward $600 billion in foreign bonds (the latest data shows $555 billion in foreign securities holdings, and the insurers also have around $30b billion in indirect exposure through the bond ETFs; this is roughly 60 percent of their portfolio). Korea’s insurers have done something similar, but on a smaller scale. There was a reach for yield on a massive scale, as their “home” markets weren’t generating the returns they had promised savers. This poses a problem right now—especially as a large portion of this book, over 60 percent, typically needs to be hedged against FX risk in the market (some is balanced by domestic foreign currency policies) more or less continuously. But it is in my view a solvable problem. There are at least three potential issues— 1) The insurers have traditionally needed to hedge (through foreign exchange or cross currency swaps, see this blog) a portion of this exposure with the banking system to limit their currency mismatch (having invested abroad, they are exposed should their “home” currency appreciate, reducing the value of their investments abroad). Those hedges are typically done on a short-term rolling basis, as the insurers assumed they could roll over maturing swaps every 3 months or so. Hedging long-term investments with short-term hedges was a central element of this strategy. 2) A portion of their investments are in corporate bonds—whether the traditional investment grade bonds Japanese insurers bought, or the more adventurous bonds (dollar callables, ultra-long dated bonds, dollar bonds issued by non-U.S. firms) that the Taiwanese favored. Many of these bonds have lost value recently (safer Treasury and Agency portfolios have held up better). 3) In some case, a portion of the portfolio has been farmed out to third party asset managers who themselves face constraints as they may use leverage and may have promised to stay currency hedged. Big sovereign pensions funds with an allocation to “credit” often have done the same. The first two problems are solvable in my view, with cooperation between the “home” country central bank and the regulators. The key countries have either very ample reserves, or ample reserves and access to the Fed’s swaplines. In normal times, I believe in strong prudential regulation—and I have criticized the Taiwanese for letting their lifers run a bit wild. But in the face of a pandemic, it can make sense to loosen regulatory constraints—this is the time to make use of regulatory flexibility and existing buffers. And similarly, in normal times, it is risky for the government to enable these trades by providing the insurers with low cost hedges (the newly disclosed $100 billion swap book of Taiwan’s central bank, the CBC, is a case in point). But in times of crisis, the direct provision of hedges to regulated insurers who are in a bit of a pickle is a sensible use of reserves—and I believe the Japanese should be considering ways to facilitate the provision of swap financing to their regulated insurers (whether directly, or through a dedicated window used by a bank intermediary that basically acts as a pass through). The broad idea is the financial equivalent of sheltering-in-place—insurers have long-term liabilities, so they need not be forced sellers, or even forced hedgers. They can use their balance sheet to absorb short-run volatility—and if needed, they can draw on their capital (and potentially new capital from their home governments) to absorb losses, as their home governments effectively provide a form of portfolio insurance. Let’s start with the currency hedging need. The risk of an open position in this case comes when the “home” currency appreciates against the dollar. Japanese insurers would lose money if the yen went to 90 (a rise in the yen’s value vs. the dollar; it takes fewer yen to buy a dollar, and in this case, dollar assets are then worth fewer yen). Taiwanese insurers would feel a bit of pain the Taiwanese dollar appreciated through say 28 or 29… So far the currency market moves haven’t hurt these portfolios, even the unhedged bits, as the dollar has generally strengthened (and the yen depreciated). And should market conditions change, in all probability the Japanese government and the Taiwanese government would act to limit a disorderly appreciation. Remember, there is no limit to how much you can intervene to block appreciation. So even an open position is ultimately a manageable short-term risk, so in my view existing open books don’t now suddenly need to be closed to “derisk.” (Trying to do so would generate demand for dollars to borrow, as closing the book in this case means borrowing a dollar and then selling the dollar to buy your home currency—e.g. reversing the currency leg of the initial use of your home currency to purchase foreign bonds.) If firms are worried about this, their home governments can directly provide portfolio insurance against extremely large FX moves (guaranteeing that the insurers wouldn’t lose money from a move bigger than a certain defined amount) while regulators relax prudential regulations and allow the lifers to temporarily run bigger open positions. Alternatively, the government can directly step in and provide the hedge. One unexpected advantage of Taiwan’s decision to disclose that it already has a substantial swaps book is that it provides a model here—not a model of good behavior in normal times, but a model of the options available to those countries with substantial reserves and private sector dollar exposure in a crisis. I don’t know if the lifers directly hedge with the CBC, or, more likely, do so through the banking systems (most of the lifers are part of bigger financial conglomerates).* In some sense it doesn’t matter—the CBC has long used a portion of its reserves to provide FX funding or hedging for the lifers (the CBC swaps FX for TWD, the lifers swap TWD for FX which they then invest abroad). And it can increase the provision of these hedges. Absent disclosure, this would have meant reserves would “disappear” from the CBCs balance sheet. But now that the CBC is disclosing its forward book, it could show both a fall in reported reserves, and increased provision of swap funding to local financial institutions. With over $450 billion in reported reserves and close to $600 billion in foreign currency assets the CBC isn't financially constrained.** Japan also has a substantial pool of dollar reserves—and the ability to borrow more from the Fed. Korea the same. So between the regulatory forbearance for open positions, government insurance against losses from big FX moves and the direct provision of hedges, the underlying currency mismatch among the big Asian insurers can be addressed. And it can be done in ways that put minimal stress on bank balance sheets. Alas, the currency mismatch is an easier problem to solve than the fall in the value of the corporate bonds that Asian insurers were increasingly buying (as hedging cost rose, the insurers reached for credit risk). The lower market value of investment grade bonds may reflect an overshoot, as there have been a lot of forced sellers in the market. Or it may reflect a real shock that really has reduced the expected return over time on these bonds. It depends on the individual company. But let’s assume there are real losses. And let’s further assume that some bonds will be downgraded and fall out of the subset of bonds that regulated insurers normally can buy. Those real losses can be absorbed by the equity capital of the life insurers. And if, over time, the losses exceed the insurers’ equity capital, the policy holders—who have been promised a fixed payoff over time—can be bailed out by a government capital injection. The long-term “home” currency liability structure of the lifers allows them to be patient (they need to rollover their hedges, but hold the long-term bonds against their long-term liabilities). In normal times a regulator would worry if the insurer’s capital fell, and likely encourage the insurer to sell its riskier assets and/or raise capital (and regulators do need to worry about the possibility that undercapitalized insurers would gamble for redemption by taking big new risks once the situation stabilizes). But at a time when those who can shelter in place should, the regulators can simply allow the insurers to operate with less capital (or inject government capital if they want) while they hold on to their existing portfolio (This no doubt will require relaxing some regulatory restrictions as portfolio quality falls). That portfolio may well be a long-term problem. It doesn’t have to be a short-term problem. The regulators can take steps to make sure the insurers aren’t forced sellers. Note here that Taiwan’s insurers are more thinly capitalized than the Japanese insurers, so Taiwan’s government may need to be thinking seriously about government equity injections relatively quickly (see the IMF’s Global Financial Stability Report). Finally, a brief word on third party managers—in a sense, these pose the most difficulties, as they typically have to invest to achieve a certain mandate and thus don’t have the flexibility of in house portfolios. It may make sense though to bring some of those portfolios back in house (when possible), or to give the third party manager flexibility to essentially maintain a static portfolio even if it breaches some contractually agreed risk and volatility thresholds. One basic truism of a market is not everyone can sell at the same time. My point is simple: think creatively of ways long-term money can ride out a crisis that by its nature will be relatively short-term. Some strategies that worked in normal times may not work now. And the kind of prudential regulation that is absolutely essential to build buffers in normal times now needs to be turned on its head. In good times, you build buffers. In the face of an unexpected shock, you draw down on those buffers. Finally, I no doubt have gotten some things wrong here.  This is offered in the spirit of putting forward ideas that help, even if they haven't been fully stress-tested.   * Very, very roughly—and this is a way of simplifying things to make the math easy that intentionally is not precise—a quarter of the $600 billion foreign bond book of Taiwan is hedged vs. domestic foreign currency policies, a quarter isn’t hedged (this can vary a bit, a quarter may be high), a quarter is hedged at home (vis a vis the domestic financial system and the CBC), and a quarter is hedged through proxies and in the offshore NDF market). In my view, the CBC could easily provide another $150 billion in hedges out of its $450 billion in on balance sheet reserves ($300 billion would still be 50 percent of Taiwan’s GDP). ** There is a longer-term issue here as well. The lifers accounted for over three quarters of the net portfolio outflow that balanced Taiwan’s 10 percent of GDP current account surplus—so a likely slowdown in new foreign bond purchases would potentially generate pressure on the Taiwan dollar to rise. I thus expect the CBC to resume buying foreign exchange if global trade starts to normalize. Normally that would worry me—Taiwan’s dollar should be stronger in a normal world. But right now there are more important fights.

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