Because of their larger trade exposure, Asian economies are most vulnerable to the U.S.'s predicament. The region, excluding Japan, accounts for 48% of the trade deficit of the U.S., which means that any unwinding of the U.S.'s trade imbalance will have the largest impact on Asia.
While growth is picking up across Asia, the figures mask the lack of domestic activity in many of the economies. Nearly all the growth comes from exports, mainly to the U.S. and China. Domestic demand hasn't reached the point where companies feel confident enough to start spending and hiring again.
Even though its net income soared by 47% in the first nine months of last year, Siam Cement PCL of Thailand is still putting off investment. If demand for the company's cement products continues to grow at its current pace, it would probably take three or four years for Siam Cement to significantly step up investment, says Vice President Kan Trakulhoon, citing its excess capacity. Employment has remained roughly constant at 17,000 workers for the past few years.
Similarly, South Korea is expected to grow by 5% this year, but companies there remain cautious, said Tae Shin Kwon, a deputy minister for international affairs in South Korea's Finance Ministry. Domestic business investment last year was "not good," Mr. Kwon said.
KT Corp., South Korea's former national telephone monopoly, won't ramp up investment and hiring until it sees a rebound in demand. "We are not seeing that yet," says Lee Yong Kyung, the company's chief executive. Sales nudged up 1% last year. As a result, the company intends to keep capital expenditure at the same level as in 2003, he says. Last year, it cut its work force 13%. "We will not see a massive hiring cycle this year," Mr. Lee says.
Ultimately, narrowing the trade gap could involve painful adjustments for Asian nations, such as allowing their currencies to appreciate more agains the dollar. But despite pleas from U.S. and European economic officials, Japan and other Asian countries don't appear willing to let that happen. Japan spent nearly $200 billion on currency-market intervention in 2003, restraining the yen's rise against the dollar to 11%, compared with the euro's 20% rise against the dollar. This year, Japan has continued to intervene aggressively.
Japanese companies have said their profits would evaporate if the Japanese central bank stops intervening to keep the yen down. In a survey of 77 major manufacturers released last week by the Ministry of Economy, Trade and Industry, about 80% said their corporate profits and capital investment would suffer if the yen stays long term in a range of ¥100 to ¥105 to the dollar. Earlier this month, Akio Mimura, president of Nippon Steel Corp., told a panel discussion: "With the yen at ¥105 per dollar, we're about ready to scream."
At a meeting of finance ministers from the Group of Seven leading industrial nations to be held in Florida early next month, European officials are expected to ask for some sort of joint statement for keeping the euro from rising further against the dollar. The euro zone's currency has jumped by more than 50% against the dollar, from its lows a couple of years ago, raising worries that it may snuff out Europe's fledgling economic recovery. Since the European Central Bank isn't intervening to keep the euro down -- unlike the Asian central banks -- the common currency has borne the brunt of the dollar's fall.
Few economists expect the U.S. to go along with such a plan. Outright intervention, which some European policy makers have hinted at, is even less likely. The weakening dollar, after all, is just what is needed to rectify the trade deficit, by driving up U.S. exports and lowering U.S. imports.
"I'd be very surprised if the U.S. were to agree to actively engage in a joint intervention," to lift the dollar, says former Treasury chief economist Richard Clarida. "Interventions aren't likely to have a sustained impact on currencies without corresponding policies to back them up. In the U.S. that would be a tightening of monetary policy, which isn't on the horizon."
While a growing number of economists think the U.S.'s imbalances pose a major risk, both to the U.S. and to the world, one important one, U.S. Federal Reserve Chairman Alan Greenspan, appears to remain sanguine about it. In recent speeches, Mr. Greenspan has said the market should correct the problems. "If no measures are taken to adjust the current-account deficit, the market will do it," he said following a recent speech in Berlin. "It is only if there is the perception that rigidities in the systems would prevent an adjustment, then actions should be taken."
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