ASIA FOCUS-Japan risks loom in 2nd Asia crisis
05:10 a.m. Jun 28, 1998 Eastern
By Chris Johnson
BANGKOK, June 28 (Reuters) - A year after Asia's economic crisis began,
Japan is shaping up as the biggest potential source of further
turbulence.
Risk analysts say Asia is in for at least another year of economic
suffering and its troubles could last far longer.
But it all depends on Japan.
Tokyo's deepening problems threaten to open an even worse, second Asian
crisis that could spill out of the region, sweep the United States and
other Western economies into recession and possibly generate a wave of
politically destabilising nationalist protectionism.
China and Indonesia are also potential risks for the region, but neither
is likely to have as great, or as immediate, an impact as Japan, the
analysts said.
''The biggest knock to sentiment is increasingly fear about Japan's
economic problems,'' said David Beers, managing director of the
sovereign ratings group at Standard & Poor's in London.
''The weaker the yen gets, the greater the pressure on other Asian
currencies, the more serious the risk of debt servicing problems for
Asian countries and the bigger the number of Japanese imports flooding
into the United States,'' he said.
It is hard to see how the yen could quickly recover.
The economic whirlwind that has swept Asia's former ''tiger economies''
into recession since the devaluation of the Thai baht on July 2, 1997,
has helped tip the Japanese economy into a recession and has exposed
serious flaws in its financial system.
Faced with a possible deflationary spiral as prices, incomes and output
slide, Tokyo's only option appears to be stimulative measures that would
help the country spend its way back into growth. This is almost certain
to keep pressure on the yen.
''Japan is melting down,'' said Bob Broadfoot, analyst at Political and
Economic Risk Consultancy in Hong Kong.
''The Asian crisis is rapidly turning into a yen crisis, and the biggest
risk is that the yen may continue to fall to a level where the problem
becomes one of a strong dollar,'' he said.
With the United States approaching an election campaign, a widening U.S.
trade deficit and surging Japanese surplus would increase pressure for
protectionist measures and nationalist trade policies that would
heighten regional tension.
A falling yen would cause further problems for other Asian high
technology producers, including Taiwan and South Korea and, further
afield, Singapore and Malaysia.
At a minimum it would force Asian manufacturing prices lower; at worst
it would trigger competitive devaluations and deflation and possibly
even industrial depression.
China, too, would come under more pressure to devalue, but most analysts
say the immediate risk of this is overstated.
''A yuan devaluation is a risk, but not in the next six to nine
months,'' said Bernard Eschweiler, Singapore-based head of economic
research for Asia at J.P. Morgan.
Most economists believe the U.S. Federal Reserve's joint intervention
with the Bank of Japan on June 17 to buy yen and sell dollars was
prompted by China's warnings over pressure on the yuan from the falling
yen.
That showed how afraid Washington was of the possible consequences of a
yuan devaluation, but it made the reality of the threat no more
immediate, they say.
''I don't see Chinese exports being made much more uncompetitive by the
yen's fall,'' said Broadfoot. ''China still gets plenty of foreign
investment.''
The real threat to China comes from its own inherent weaknesses,
uncompetitive state enterprises and the lack of funds in its banking and
financial system, he said.
''We don't see it happening in the near future, but if China's domestic
problems were to get the better of it, how would a politically unstable
China react to India with nuclear weapons? Or to Taiwan? Or the United
States in an election?''
In Southeast Asia, Indonesia remains the biggest worry for many analysts
with the possibility of another breakdown in authority or a new
government hostile to its neighbours posing possible threats to the
Strait of Malacca between Sumatra and Malaysia and Singapore.
The strait, a major shipping lane for east-west trade, would have to be
kept open at any cost and an unstable Indonesia, a major producer of
paper, oil and other commodities could also disrupt financial markets
around the world.
But the likelihood of Indonesia's troubles hitting most of the rest of
Asia is generally seen as low.
Ultimately, possibly the biggest political risk is that Asia's leaders
may not address properly the region's problems.
''I see a possibility of Japan not owning up to the scale of its
problems,'' said Ronald Stride, senior vice president of U.S. management
consultants Booz-Allen & Hamilton in Bangkok. ''The downside risk is
that sufficient action will not be taken.''
Beers agreed, saying political support for the economic reforms was
bound to be strained when the social consequences of change, even if
fairly temporary, became evident.
''If there is one reason why confidence in Asia's recovery is hurting,
it is the perception that policy makers are doing too little, too late
to solve their problems,'' Beers said.
''It depends on the policy makers,'' he said. ''Political risk focuses
on the capacity of Asian governments to manage reform.''
And if leaders can't deliver, they are unlikely to survive.
''You can be assured that we will see more political adjustments,'' said
Eschweiler. ''That is inevitable.''
Copyright 1998 Reuters Limited. |
