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Japan banks see potential in Asia currency NDFs

TOKYO: Japanese banks see growth potential in the non-deliverable forward (NDF) market for emerging Asian currencies, as Japanese firms are more sensitive to currency risks in the wake of the 1997 Asian currency crisis.

NDFs' allow companies to hedge foreign exchange risks in emerging countries, where hedging means are limited due to either underdeveloped local derivatives markets or government control.

NDFs are already actively traded in Singapore and Hong Kong, but major Tokyo banks started offering NDFs to clients only last year after Japan's Ministry of Finance lifted its ban on NDFs in December 1998 as part of its financial deregulation drives.

"Only a few Japanese banks, including ourselves, currently deal in NDFs, but the market is likely to grow due to strong client needs for this type of instrument," said Hank Note, chief dealer of the foreign exchange unit at Sumitomo Bank. "We are marketing NDFs to our clients with a goal of developing it into an important product of ours."

ACCOUNTING RULE CHANGES SEEN BOOSTING NDF DEMAND

Although no official international statistics exist, bankers estimated the daily worldwide turnover for Asian currency NDFs to be close to $3.0 billion.

But NDF deals done by Tokyo-based banks were only worth about $300 million or $400 million a month, bankers said.

Masayuki Takaura, senior vice president and head of foreign exchange at Sanwa Bank, said the bulk of NDF deals done by Tokyo banks were proprietary trading.

"So far, clients have been slow to respond, as the product is not very widely known among Japanese firms," Takaura said.

But changes in Japan's accounting rules could become a catalyst for increased usage of NDFs by Japanese firms with a network in Asia, he said.

Starting in March, Japanese companies are required to place greater emphasis on consolidated results when filing earnings reports.

"In the past, Japanese firms tended to let their overseas units take care of exchange rate risks themselves. But as consolidated accounting becomes more important, they will have to be more sensitive to exchange rate risks that their overseas units face," Takaura said.

JAPAN FIRMS EYE NDF FOR HEDGING VS YUAN DEVALUATION RISKS

The Korean won was the most actively traded currency in the NDF market, with daily turnover in Asia estimated at around $800 million, bankers said.

US investors investing in Korean stocks have been using won NDFs actively for hedging, bankers said.

The Taiwan dollar was the second largest with daily turnover of around $500 million, followed by around $200-300 million for the Philippine peso, bankers said.

Although the Chinese yuan market's daily turnover is estimated to be worth less than $200 million, it had the greatest growth potential, bankers said.

"As there is no local forward market for the renminbi, the yuan NDFs probably have greater potential than the Korean won, Taiwan dollar or the Philippine peso for which local forward markets do exist," said a dealer at the Bank of Tokyo-Mitsubishi.

Sanwa Bank's Takaura also said: "Japanese manufacturers doing business in China are showing strong interest in finding hedging tools for the renminbi."

Speculation of yuan devaluation, which was rampant last year, has faded as China's balance-of-payment outlook looked brighter this year in contrast to a 31 percent drop in the nation's trade surplus last year.

But Sumitomo's Note said: "While there seems to be no near-term risk of a yuan devaluation, Japanese firms are still interested in finding ways to hedge themselves as such speculation might emerge again in the future."-Reuters