The east Asian portfolio glut and the rise of unconventional exchange rate management

Abstract In recent years, non-bank financial actors such as pension funds and life insurance corporations from Japan, South Korea and Taiwan have emerged as sizeable investors in global bond and equity markets. What explains the rapid internationalization of institutional investors? As this article shows, east Asian investors' global search for yield is far from a purely market-driven development. Public authorities actively ‘de-risked’—that is, facilitated and made viable—this internationalization, notably by channelling public funds abroad, by easing regulatory restrictions on foreign currency trading and by experimenting with new forms of central bank support for foreign exchange markets. From a policy perspective, promoting portfolio outflows allowed authorities to show markets the intention to depreciate their currencies, yet without resort to highly politicized official interventions. In drawing on market mechanisms to align private-sector profit interests with broader policy goals, this leveraging of portfolio flows for macroeconomic policy purposes constitutes a novel and unconventional form of exchange rate management. While highly effective in the decade following the global financial crisis of 2008–9, the pivot to global monetary tightening from 2021 onwards presents new challenges for states seeking to coordinate macroeconomic policy with private profit interests.