Japan’s Saving, Financial Linkages, and Capital Mobility in East Asia before the 1997-98 Currency Crisis: An Empirical Investigation

I examine financial linkages in East Asia before the 1997-98 crisis by testing long-run and causal relationships between Japan’s saving and eight other Asian economies’ domestic investment. The results suggest that there is a long-run (cointegrating) relationship between Japan’s saving and the domestic investments of four of the five crisis economies and Taiwan. There is also evidence that Japan’s saving Granger-causes the domestic investments of five economies. In contrast, no such long-run and causal relationship is found with respect to each country’s own domestic saving and investment. The results suggest a presence of financial linkage and high capital mobility in the region prior to 1997-98 and lend support to the literature on the role of financial contagion in the Asian currency crisis.