Thread,
WSJ had the following on Japan's importance to Asia's recovery (or lack of it). This has been discussed here on the thread since late last year when we collectively identified Japan, and how they dealt with their economy, as a key issue in the recovery of all of Asia.
Reprinted here for personal use only.
Japan's Downturn Punishes Asia,Exacerbating Woes Across Region
By DARREN MCDERMOTT
Staff Reporter of THE WALL STREET JOURNAL
SINGAPORE -- Just when it seemed that Asia's battered fortunes could sink no further, one of investors' longstanding fears is emerging to bash them yet again: Japan's illness is killing Asia. The yen sank to a new low against the U.S. dollar Wednesday amid a growing outcry over the pain the Japanese currency's downward spiral is inflicting across the region.
A weak yen, which now trades close to 141 to the U.S. dollar, hits Asian companies several ways. For exporters that compete with Japanese companies, it makes it tougher to sell their wares. For others that sell directly to Japan, it makes their products less attractive to Japanese consumers. And for any company that relies on Japanese capital to operate, a cutback in lending by Japanese banks in response to the yen's depreciation worsens an already suffocating credit crunch in the region.
Impact On China
The stakes are highest in China, the region's largest economy after Japan. China's central-bank governor, Dai Xianglong, complained Tuesday that the yen's weakness was "having a very negative impact on Chinese imports and exports and the utilization of foreign capital." His comments sparked new concerns that Chinese officials were wavering in their commitment to keep the yuan's exchange rate at around 8.28 to US$1.
For Hong Kong, the mere possibility of a currency devaluation in China is unsettling to investors who worry that such a move would bring down the Hong Kong dollar as well. Increased fears about the sustainability of the Hong Kong dollar's peg to the U.S. currency have forced authorities to raise interest rates to thwart speculators. But higher rates threaten to undercut corporate performance and the property market, a pillar of Hong Kong's economy.
The gloom was echoed across Asia, as the yen's drop Wednesday reinforced growing concerns about many of the region's economies and currencies. The Singapore dollar and Australian dollar, which traders have begun to use as easily tradable proxies for the region, both slumped against the U.S. currency. The Australian dollar slid to 58.25 U.S. cents from 59.83 cents late Tuesday, and appeared headed toward a 12-year low of 57.10 cents; the Singapore dollar fell as low as 1.7300, from 1.7075 late Tuesday. The rupiah skidded to 13,000 per dollar, from 11,8125 late Tuesday. Although the Hong Kong dollar has stayed close to its linked rate of 7.80 to the U.S. currency, the market is flashing signs that people expect a depreciation.
Monetary Policy
Asia's economic crisis isn't likely to abate soon, regardless of Japan's performance. Morgan Stanley, Dean Witter & Co. economist Tim Condon issued a report sharply critical of the International Monetary Fund's bailout efforts and tight monetary-policy stance in the region. Crisis-hit economies will have to back off from the high interest rates that are crushing their economies, and instead cope with lower exchange rates, he said, predicting further substantial falls in regional currencies. While the IMF certainly has lost some credibility in Asia, traders placed the blame for the turmoil in financial markets this week on the Japanese government, citing its inability to revive the economy and halt the yen's tumble.
Japan, which was once widely credited with helping create the Southeast Asian miracle, is now being blamed for exacerbating the region's woes. Japanese capital, provided by banks and invested by manufacturing companies looking for a cheap source of labor, fueled Southeast Asia's growth for the past 15 years, says Fred Wu, an economist at the Development Bank of Singapore. Japanese banks hold between 25%-50% of the foreign debt of crisis-stricken Asian countries. The collapse of these countries' currencies should make them more attractive than ever as production centers for Japanese companies. Sony Corp., for example, will continue to make high-tech goods such as flat-screen television sets and compact-disk players in Southeast Asia. And it will benefit from the now-cheaper cost of making products that can be sold in Europe, the U.S. -- and, hopefully Southeast Asia -- says Koichi Izukura, director of corporate communications at subsidiary Sony International in Singapore.
Cutback in Lending
But Sony's manufacturing gains "have largely been offset by the depreciation of the yen against the dollar," says C.H. Kwan, senior economist at Nomura Research Institute in Tokyo. And the effects of that depreciation -- on top of the collapse of Southeast Asian economies -- worsen Japanese banks' bad-debt problems in the region. Many are pulling back loans from struggling Asian companies at a time when the region is most desperate for capital. Companies like Sony may not be moving out of Southeast Asia, but they likely won't be sinking in new capital anytime soon either, Mr. Kwan says. For every 1% the yen falls against the dollar, Mr. Kwan estimates, economic growth rates in the rest of Asia shrink about 0.1%. By that reckoning, the yen's 21% fall in the past year has wiped two percentage points off Asian growth rates. Some economists question whether the economic ties between Southeast Asia and Japan should be prompting such a sell-off in the region's financial markets.
"It's a very asymmetric relationship, heavily dominated by imports from Japan" which become cheaper as the yen falls, says P.K. Basu, regional economist at Credit Suisse First Boston. "Having said that, I don't think that [a weaker yen] is going to help these currencies in the near term because the belief is any positive impact will be overwhelmed by falling investment inflows from Japan. Right now, any potential good news is ignored and any potential bad news is acted upon."
Indeed, Asia's currencies are trading in closer sympathy with the yen against the dollar than ever before, says Vincent Low, an economist at Merrill Lynch in Singapore.
"The region is being traded as a whole," says a foreign-exchange executive at a U.S. bank in Singapore. "The Southeast Asian economies followed Japan's economic model. Australia tied itself to Asia when Asia was seen as so hot. Now people are paying for their exposure. The whole region is grinding to one deep recession." |
