Mark yesterday I talked about this Yen loss vis a vis dollar and its impact on ASEA and China... todays IHT carries an interesting article on that..
As Yen Weakens, Japan's Neighbors Begin to Worry
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By Philip Segal International Herald Tribune
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HONG KONG - As investors stampeded out of Asia in 1997, igniting a global financial crisis after Thailand floated its currency, many analysts concluded that the world had been too sanguine about foreign-exchange risk and its potential to wreak havoc on capital markets and national economies.
Two years later, the good times in Asia's stock markets are back, cheered by the fact that Asia's economies have mostly returned to modest growth. And, as before the crisis, currency risk seems to be almost a non-issue: Currencies are well priced, goes the thinking at most major Hong Kong brokerages, with little risk of major movement.
Both local and foreign investors, in turn, are delighted with stock-market returns in both local and U.S. dollar terms that have topped 100 percent in the past year alone. Even factoring out the gains in Asian currencies, the markets across the region have been world-beaters this year.
''What's surprising is all these currencies seem to have settled into this range,'' said David Semple, manager of Van Eck's Asia Dynasty Fund. ''They seem to be suspiciously quiet.''
But this placid state of affairs is causing concern in some quarters. What would happen, for example, if the yen ends up meeting the expectations of many, and falls sharply toward the end of this year? What if China devalues the yuan? In other words, could a financial panic spurred by a currency crisis repeat itself?
This is not a hypothetical dilemma. The yen is forecast by most analysts to weaken by 15 percent or more by the end of the year from where it stood Wednesday. The most pessimistic forecasts have the yen weakening by 40 percent before the end of the year.
On Wednesday, a senior Japanese Finance Ministry official said Japan was ready to intervene again in the currency market to weaken the yen as a way of stimulating economic growth by making Japanese exports cheaper abroad. Traders estimate that Japan has spent $15 billion in the currency market selling yen in the past week.
The dollar closed Wednesday in Tokyo at 122.35 yen, up from 122.20 yen on Tuesday.
''It is too soon for the yen to appreciate,'' said Eisuke Sakakibara, the vice finance minister known as ''Mr. Yen'' because of the way his comments can move markets. ''We are ready to take decisive action anytime if necessary.''
The potential weakness of the yen also is arousing concern in China, which has a fixed exchange rate and a rapidly worsening economy beset by falling foreign investment and exports.
Although China has repeatedly promised not to devalue the yuan, a growing number of analysts are predicting that it will be forced to do so if the yen slips.
Toward the end of this year, as the yen weakens, ''China will use Japan as an excuse to devalue,'' said David McClain, who writes the weekly Economic Perspective column for America's United & Babson Investment Report.
Mr. McClain is joined in his forecast by Angus Armstrong, economist at Deutsche Securities in Hong Kong, who figures China will devalue the yuan by 10 percent to 15 percent.
The consequences of any devaluation, some analysts fear, could be a renewed bout of the competitive devaluations seen in 1997 - a chain of events that appeared local at first but then infected the rest of the world's emerging markets.
Fortunately for Asia, even if China devalues, an exact repeat of 1997 does not seem to be in the cards. What sank much of the region two years ago was that stable currencies encouraged businesses with local currency revenues to borrow dollars, because the dollar interest rate was lower. When the currencies of Asia fell, locals did not have enough local money to change into the dollars they needed to repay their loans.
Today, banks in Asia are still badly in need of new money to recapitalize. Stung by major bankruptcies in China and lots of write-offs in other parts of Asia, foreign banks are simply not lending much money at the moment.
But one problem that could be repeated is a mass exodus of money - a lot by local standards but a pittance for the foreigners - which could once again send stock markets plunging along with currency values. For ordinary households, that threatens a repeat of the soaring import prices experienced two years ago.
Despite the almost tripling of some stock markets in the region, Asia's bourses are still tiny by world standards. On June 1, Credit Suisse First Boston calculated total market capitalization for Asia's nine largest markets outside of Japan at just under $1 trillion.
That comes to less than the combined market values of Microsoft Corp., General Electric Co., Wal-Mart Stores Inc. and Merck & Co., the four most valuable U.S. public companies.
Two years after the collapse of Asia's markets, the region's prosperity and stability still depends, as it did last time, on the enthusiasm of foreign investors who can leave these countries in the space of a few hours. More worrying for Asian markets is that many of these investors have made fabulous profits in just a few short months, giving them added impetus to cash out if a falling yen should signal an end to this year's bull market in Asia.
Mr. Semple said that unlike 1997, when Asian currencies plunged after the flotation of the Thai baht, today ''all the pressure's on the upside for all of these currencies.''
That is because Asia is running huge trade surpluses with the rest of the world, instead of the big deficits it was posting just before the crisis hit.
As a result, the immediate pressure on the currencies is that they become more - and not less - valuable against the dollar. Less than two years after the currencies of Thailand and South Korea were in ruins, forcing their governments to go to the International Monetary Fund for hard currency bailouts, their central banks have been selling what are supposed to be free-floating local currencies and buying dollars or euros, in an effort to keep the baht and the won cheap and their exports competitive.
For now, the yen is holding its own. In the first five months of the year, it was up 12 percent against the Singapore dollar, and also sharply stronger against the currencies of Taiwan and South Korea, two of Japan's big competitors. Even against Asia's three remaining fixed currencies, those of China, Hong Kong and Malaysia, the yen is up by almost 8 percent since the start of the year.
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