Authors: Patturaja Murugaboopathy and Gaurav Dogra

(Reuters) – Asia’s foreign exchange reserves have fallen this year as central banks intervened to support their currencies, with Japan, Indonesia and South Korea leading the declines.

Foreign exchange reserves in 12 countries from Japan to India fell by about $50 billion to $7.5 trillion by the end of June. They had risen 2.2% over the same period last year.

Foreign investor inflows to the Asian bond market fell 34% in the first half of this year compared with a year earlier, according to data from stock exchanges and bond market associations.

While the decline in reserves is not severe enough to trigger a financial crisis or cause countries to struggle to pay for imports, given that most have healthier balance sheets and are keeping foreign liabilities under control, analysts note that it could still weigh on investor sentiment and lead to outflows from portfolios.

Import coverage ratios, which measure the number of months a country can sustain imports if all other inflows cease, have risen this year for India, South Korea and China. But they have fallen for countries such as Malaysia, Indonesia and Thailand, according to Reuters calculations.

Asian currencies fell sharply in the first half of the year as the Federal Reserve’s hawkish stance and high yields lifted the dollar. The yen was the biggest regional loser, down about 11% against the greenback, prompting several rounds of suspected interventions by the central bank to support the currency this year.

Meanwhile, Indonesia’s central bank also raised interest rates in April to stem the weakening of the rupiah and prevent capital outflows.

With major events such as the US election and potential changes in Federal Reserve monetary policy coming up later this year, regional currencies are expected to see greater volatility in the second half of the year.

“When the US Federal Reserve finally starts cutting interest rates, which could cause a temporary depreciation of the dollar, the credibility of Asian central banks will be tested,” said Saurav Sen, senior analyst at Gimme Credit.

“Countries that have the ability to increase reserves during this time to keep their currencies competitive against the dollar will be able to manage volatility. Countries like China and India come to mind,” Sen said.

Bucking this trend, India’s foreign exchange reserves rose by 4.9% to $653.71 billion in the first half of the year.