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To: Henry Volquardsen who wrote (13248)	6/16/1998 2:32:00 PM
From: Lalit Jain	Respond to of 116764

Asia crisis getting deeper - Goldman's Davies NEW YORK, June 16 (Reuters) - Goldman Sachs chief economist Gavyn Davies said the Asian shock is now getting bigger and cut his estimates for Japan's Gross Domestic Product (GDP). ''This crisis is working out to be somewhat deeper than we would have imagined ... It's not turning around in the way that we were hoping,'' Davies said on a conference call to clients. Davies said Goldman is now expecting a decline in Japan's GDP of at least 1.0 percent this year, compared to a previous forecast of flat. In 1999, GDP ''could still be positive, but not much more than plus 1.0 percent.'' ''Going forward, it's important to judge whether things may actually get worse in a snowball fashion in Japan. There's a real risk of a deflationary spiral,'' he said, noting that there is serious risk of futher downgrades of Japan by Goldman if government policy is not adjusted ''sharply.'' The weakness could help keep the lid on global inflation and hold at bay any rise in interest rates by central banks, he said. ''The runoff in investories we are about to see in Japan will be a further significant deflationary shock to the manufacturing sector and should keep (global) inflation at levels which will deter any of the major central banks from tightening,'' he said. Japan recently reported a second-quarter GDP decline of 1.3 percent, which on an annualized basis represents its worst postwar economic performance. Goldman continues to expect Chinese GDP at 7 percent, he said, and he does not expect any devaluation of the Chinese currency or the Hong Kong dollar this year. If there were to be a devaluation, however, he would double the impact of the Asian crisis on world growth. He cautioned that although the crisis is deepening, it is still not a shock big enough to drag the world into recession, with reasonably robust demand in the United States and Europe. In terms of currency, he said ''our previous view that the yen would trade in the 130's over three or six months is looking increasingly problematic''. Goldman is now seeing the yen at around 150 to 160 for a while ''in the run-up to the policy changes which may occur over the balance of the year.'' ''The weak yen is likely to be sustained. There may be a burst of intervention which will temporarily reverse that and put it back into the low 140's, high 130's, but a permanent reversal doesn't seem probably in in the next few months,'' he said. Dollar/yen hit a near-eight-year high of 146.75 overnight only to suffer a sharp pullback to 142.65 amid profit-taking and fears of yen intervention. Dollar/yen had recovered above 144.00 at m idday but retreated below that level on the Nikkei report. On the bond market, he said there could possibly be a limited rally in bonds in the second half of the year as the market begins to think about the possibility of a Federal Reserve easing as the market did in late 1997. Goldman is not predicting the Fed will lower rates this year, he said.