FUND VIEW-Stable yen welcome but reform is key
11:48 p.m. Sep 05, 1998 Eastern
By Sarah Davison
HONG KONG, Sept 6 (Reuters) - A sudden recovery in the yen against the U.S. dollar has eased pressure temporarily on regional currencies but economists said tough reform remained Asia's key to lasting stability.
''Stabilisation in the yen is good news in Asia generally, but the best this can do for the region is just help to steady sentiment,'' said Chris Tinker, head of regional economics at ING Barings. ''This is not something that will generate a return of confidence in and of itself.''
Over the past 10 days, dollar/yen -- one of the the most important fundamentals for Asian markets -- has weakened to 134 from a close of around 144 on August 26.
Dollar/yen was trading at 147 on August 11, one month after the United States joined forces with the Bank of Japan to stem a freefall in the yen as markets fretted over Japan's economy and a possible devaluation in the Chinese yuan.
''This is good news for the rest of Asia,'' said Tim Condon, regional economist at Morgan Stanley Dean Witter in Hong Kong.
''One major source of concern has been the prospect of a collapse in the yen, and that has kind of receded from people's minds. That was really overhanging the regional markets.''
Asian currencies have not uniformly followed the yen into stronger territory in recent days.
The Thai baht, the Taiwan dollar and the Indonesian rupiah have all traded stronger but the Korean won -- one of the Asian currencies most exposed to the yen in terms of competitiveness -- has depreciated to 1,342 from 1,308 on August 26.
''The fundamental solution to many Asian countries' problems still lies on the domestic front,'' said Sun Bae Kim, regional economist at Goldman Sachs in Hong Kong.
''The yen or the dollar's move has to be seen in that light. Although it may help somewhat it won't help qualitatively to pull the region out of trouble in the absence of bold measures to put these banking systems on a sounder footing.''
The yen has recovered mainly due to a weaker dollar rather than to any major shift in Japan's economic outlook.
Asian economists said risk managers were unwinding long dollar/yen positions for many reasons, including an anticipated shift in U.S. Federal Reserve policy to an easier bias as world markets continue to shudder.
The repatriation of Japanese assets on concern about the outlook for U.S. markets, doubts about the sustainability of rapid U.S. economic expansion and active borrowing of cheap yen to fund short-covering positions were also cited as reasons for
recent dollar/yen movement.
Tinker also said the yen has demonstrated its vulnerability to sentiment, describing it as a ''momentum'' currency.
''Once momentum builds, people get on a roll on this currency,'' he said. ''It tends to trade technically, and once it breaks technical support points, the market goes charging off to the next one without reference to anything else.''
A break of 139 left the yen free to gain to 133, suggesting the market will now consolidate in a range between 133/139.
Condon saw the yen resuming its weaker trend after the deleveraging of risk positions ends, and stuck with Morgan Stanley's year-end dollar/yen forecast of 160.
This outlook reinforces bank recapitalisation as the number one issue for this region, analysts said, arguing that the huge overhang of non-performing loans is preventing banks from lending, creating a vicious circle where a lack of credit leads to more defaults and even less credit.
''If governments made steps towards starting rather than delaying sovereign issues, if they brought in large doses of capital and injected it into the banks and secured their financial systems, capital would start to flow back into Asia,'' said Abhijit Chakraborrti, strategist at HSBC Securities.
''But the policy response so far remains well behind the curve and has been more destructive than constructive.''
Continued upheaval in emerging markets has made sovereign issues difficult, which will force most Asian nations -- eventually -- to issue domestic debt in a bid to mobilise this region's high savings rate.
''These countries can issue domestic debt,'' said Goldman's Kim. ''There may be a great unwillingness to do that, but that's what most countries end up doing in severe banking crises.''
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