There has been a dramatic change in the Asian economy in recent decades: excess investment has turned into excess savings. The turning point was the 1997–98 Asian financial crisis (AFC) (Figure 5.1). From the flow-of-funds data, a change in agents’ behavior has been observed, with a new preference to invest in financial assets. Asymmetry in the incentive system and the growing opportunities of financial investment (‘financialization’) – thanks to financial liberalization and innovation – contributed to such a trend. With expectations and uncertainty playing a determining role in firms’ behavior, the corporate sector’s savings are particularly high. Asia’s liquidity condition since the AFC has been further complicated by increased inflows of capital. With loose monetary policies and growing risks in advanced economies, capital flocked to emerging markets. The size of the flows to Asia surged, and the volatility of these flows increased during the 2008–09 global financial crisis (GFC). While growing demand for financial assets and rising capital flows have boosted financial sector development and stimulated growth, the risks of financial instability also increased. Debt and bank-led flows shifted dramatically from negative to positive positions in the early 2000s. Debt-led flows, in particular, significantly expanded during the post-GFC (Azis and Shin 2013).
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