Stephen,
I remain very cautious on Asia for the reasons the article you linked listed. I have to say that I thought that article was extremely balanced in its report. I am not sure I would characterize the recent Asian stocks rally a "bear rally" but I also do not believe that we have had the chance to see all the bad news. Furthermore there is still room for dissension in the G-7 concerning the oversight of global capital movement (see below). I think we will continue to see markets here in Asia very vulnerable to news and, as near as I can see, that means more volatility.
This from Stratfor (again):
Japan Proposes Mechanism for Currency Control without Credit Crunch
Japan responded graciously, but unenthusiastically, to the international financial reform plan proposed by the Group of Seven leading industrialized nations (G-7) on October 30, with Foreign Minister Masahiko Komura calling it “very timely” and Prime Minister Keizo Obuchi expressing hope that G-7 resolve would lead to international financial improvement. Tokyo then set about providing some more substantial suggestions for giving international resolve some teeth. An editorial in the Sunday edition of Japan's Nihon Keizai Shimbun pointed out that the G-7 had “stopped short of mentioning details about ways to regulate hedge funds.” The article said, “This absence may stem from a dilemma that strong capital controls or hedge fund regulation could invite a world-wide credit crunch.” The newspaper then reported half of Japan's solution to this dilemma, with Kyodo outlining the other half on Monday.
Nihon Keizai Shimbun reported on Sunday that Japan would propose the establishment of an international financial supervisory body to stop the disruptive impact of speculators on global markets. The new organization, which Japan will reportedly propose at a meeting of G-7 deputy finance ministers and central bank governors later in November, would involve the integration of the supervisory divisions of the World Bank, the International Monetary Fund (IMF), and the Bank for International Settlements. According to the report, the new organization would monitor cross border investors and capital flows, and promote information exchange and technical cooperation among national financial authorities. Specifically targeting hedge funds, it would impose new regulations on investments in the funds, while requiring that they disclose information if their activities prove to be disruptive.
The report added that Japan would propose that the IMF establish a new mechanism for quickly raising money in the international markets to provide rapid liquidity to countries in financial difficulty. At the same time, Japan will reportedly request that the IMF's involvement in structural reform of Asian economies be curtailed, as its “stringent fiscal policies caused some social unrest.” Perhaps anticipating Washington's response to what is essentially a request for more money quickly with no strings attached, Japan will also reportedly propose the establishment of regionally based funds, analogous to the IMF, in the European and Asian blocs. Finally, Nihon Keizai Shimbun reported, Japan will propose that the World Bank's debt guarantee functions be integrated under the Multilateral Investment Guarantee Agency in order to back developing countries' bonds.
With a very detailed proposal for regulating hedge funds and other speculators in the works, Japan also reportedly has a plan for defending at least its own economy against the credit crunch that such regulation and capital controls could induce. Japan's Kyodo news agency reported on Monday that “measures to shield the economy from the deepening credit crunch” would be the primary focus of Japan's new economic stimulus package. The package, to be ready by November 16, in time for Obuchi's appearance at the Asia Pacific Economic Cooperation (APEC) summit in Kuala Lumpur, will reportedly involve the government's use of public money to buy corporate bonds. The money would be drawn from citizens' savings deposited in the national postal savings system, a regular source of funds for government stimulus packages. Japanese law already allows government use of these funds to purchase corporate debt, but the new proposal will reportedly ease restrictions on the practice. In one cautionary note, Japanese Vice Finance Minister Koji Tanami on Monday said that he is not opposed to increasing government spending in the upcoming stimulus package above four trillion yen, but that the effectiveness of higher public spending in securing rapid economic recovery should be carefully evaluated. Tanami also ruled out the use of public sector pension funds as a means of easing the credit crunch.
Japan has now brought into the rest of Asia's argument that speculators are to blame for the region's economic collapse. Even Taiwan, which has weathered Asia's crisis relatively well, is now discussing strict controls on short-term capital flows as the solution for instability in international capital markets. Friday's commitment by the G-7 to tighten regulation on global capital markets, while clearly not going as far as Japan wanted, suggests that the argument may be convincing some Western nations as well. With international opinion sliding its way, Japan is now ready to launch a full-scale campaign for a bailout under its terms.
Tokyo, in a calm and subdued manner, is signaling the G-7 that the United States- sponsored solution won't work. It has reiterated the need for not only strong controls on currency flows but also the creation of a powerful, international bureaucracy for managing the international financial system. Japan's proposal seems to go far beyond proposals for a stronger IMF Interim Committee, to the creation of a secretariat to oversee the international currency system. Japan is, in effect, upping the ante in its demands for restructuring the Bretton Woods accords. It will be extremely interesting to see if these trial balloons in Tokyo emerge as formal government proposals. It will be even more interesting to see how France and Germany, Japan's allies in the G-7, will respond to these ideas.
One thing that is not in doubt is how the United States will respond. Japan's plan for a dramatic clampdown on the free cross-border flow of currency as well as for a new international secretariat places Japan in opposition to the United States, which remains committed to maintaining Bretton Woods with minimal adjustment. Tokyo knows this, and has already floated its alternatives in such a way that it can back off if need be. In truth, Japan can't back off. It is contemplating using its national savings system to underwrite Japan's failing financial system. The risks in doing that are enormous, and Japan knows it. Its proposals on international currency reform are far from frivolous. Japan is desperately looking for international solutions to its problems. If it can't have cash it at least wants institutional change. If the U.S. won't allow Tokyo to restructure and run the Bretton Woods institutions on Japanese terms, then it will again propose regional IMFs, or more precisely, the Asian Monetary Fund. If last week's proposals were the last American word on the subject, things are going to get very rough in November between Tokyo and Washington.
|
