Investors in emerging Asia are being warned to keep a close eye on a previously dormant force that could exert greater influence over the region in 2014: Japan.

While the nation looks set to increase support to emerging Asia, which will help temper potential volatility from further tapering of the US Federal Reserve’s quantitative easing programme, its economic policy experiment also poses additional risks at the same time.

When the Bank of Japan (BOJ) unveiled the biggest monetary stimulus in its history last year – a doubling of its monetary base in just two years – hopes were high over vast capital outflows and booming markets regionally, notes Frederic Neumann, co-head of Asian economics research at HSBC.

However, these largely failed to materialise, leaving the region exposed to tapering by the Fed – most readily felt last year by India and Indonesia.

But Neumann is optimistic that as gradual tightening sets in elsewhere, BOJ liquidity will begin to make itself felt, with Associations of Southeast Asian Nations (Asean) set to benefit above all.

Aside from portfolio flows to Asean, which Neumann acknowledges have not fulfilled expectations and may continue to disappoint, he argues that bank lending is of greater importance.

He notes that Japanese financial institutions are already stepping up overseas acquisitions and raising their international exposure.

“By some estimates, an additional $60-140 billion in Japanese bank lending could flow to Asean, cushioning the blow from any withdrawal of western funds,” Neumann says.

Foreign direct investment (FDI) has also picked up in the past year and should expand, with Thailand now receiving 60% of its FDI flows from Japan. Indonesia and Vietnam are also major recipients, as are Malaysia, the Philippines and India.

“All this reflects a bigger strategic shift,” adds Neumann. “With a declining population domestically, Japan’s firms are expanding into new, promising markets rather than use these as mere production bases for exports.

“A cheaper yen is thus not a hurdle to greater foreign investment, but may, in fact, spur the acquisition of overseas assets before they become more costly.”

He notes, too, that Prime Minister Shinzo Abe has already travelled to each Asean member state to sign economic agreements. Japan has announced an additional $20 billion for Asean infrastructure projects, while the Bank of Japan has signed a series of swap deals with neighbouring central banks, aimed in part at bolstering defences against a potential withdrawal of portfolio investment.

Yet while Japan’s re-engagement with emerging Asia looks likely to offer a counterweight to potential volatility in 2014, Abenomics also poses risks, warns Neumann.

“For one, a domestic stumble would reverberate more keenly throughout the region than in the past,” he observes. “A potential slump caused, for example, by the hike in sales taxes in the second quarter could lead firms to shelve investment plans and banks to pull back.”

He adds that a wobble in Japan’s bond market would have equally upsetting effects, while a weaker yen poses challenges for Korea and Taiwan particularly. Another spike, Neumann argues, would be less easily digested, although it could, in time, lead them to move even more production offshore.

While that would be bad for growth in their home economies, it would be another potential boost to markets in Asean and India, where costs are lower, notes Neumann.

China similarly might feel increasingly pressed by a cheaper yen, while Japan’s growing engagement with Asean may prompt the mainland to increase its efforts to sign trade and investment deals to secure its own economic interests.

“Investors in emerging Asia will thus need to keep an eyes on Japan. For better or worse,” states Neumann.