Asia's top
borrowers survive
trial by fire
ANALYSIS
10 Feb 1999
Rabbit Year may spring
nasty surprises
Free-spending US consumer's all that stands
between Asia and a hard place
By Larry Wee
[SINGAPORE]
EVENTS in Japan's financial markets continued
to take centrestage last week in Asia and may
dominate for a while longer, given the Chinese
New Year festivities next week.
In fact, technical manoeuvres associated with the
Japanese financial year-end on March 31 may well
influence price action in Asian markets for themonth of March as well. But going beyond that, the signs are that
the Year of the Rabbit may turn out to be distinctly
unpleasant.
Consider the recent action. After exploding to a high of
2.44 per cent last Wednesday, the yield for the
benchmark 10-year Japanese government bond (JGB)
fell back sharply in the first two days of trading this
week. Yesterday alone, it plummeted almost 20 points
from a high of 2.16 per cent, before finishing at 2.01
per cent.
The Japanese yen's fortunes against the US dollar
continue to rise and fall in tandem with JGB yields.
>From close to 117 yen two Fridays ago, the Japanese
currency had rebounded to 111.4 yen against the US
dollar in New York last Friday.
But yesterday's collapse in JGB yields saw the yen
surrendering much of last week's gains, and it was back to almost 115 yen per US dollar yesterday evening.
The key to this sharp turnaround was a stepped-up
effort this week by Japanese finance ministry
personalities to give the impression that they were going to fix Japan's big headache: Who will buy the avalanche
of new JGB issues in the coming financial year?
Meanwhile, with what seems to be a continuing lack of
clear direction, the Singapore dollar, Thai baht and
Hongkong dollar, in particular, continued to be jerked
around by events in Tokyo. The recovery of the first
two proved as short-lived as the yen's. Last night, the
US dollar was back above 1.69 Sing and sitting astride
the 37 baht level.
And the premium attached to buying the US dollar six
months forward against the Hongkong dollar is once
again rising -- from levels of less than 5 Hongkong
cents last week to more than 6 cents by last evening.
It would be tempting to attribute the lack of direction
outside Japan just to winding down ahead of the
Chinese New Year holidays. But worries have begun to set in that we could be seeing the start of something
more disturbing.
Taken to its worst conclusion, the signs of recovery
and optimism we have seen in the parts of Asia outside
Japan in the last six to eight months may turn out to be
of the "dead cat bouncing" variety.
In other words, Asian currencies and stock markets
were so grossly oversold beyond fair value that they
just had to bounce back anyway.
But what happens from here on will depend very much on how effectively and speedily remaining problems,
usually the most intractable, will be resolved. There are signs -- perhaps warnings -- that not all is well.
For example, we are starting to read reports which
suggest that the Thai economic engine -- often praised
as the International Monetary Fund's best patient -- is
starting to sputter.
Vested interests, it is said, continue to block key Thai
bankruptcy law reforms so crucial for the
reconstruction of Thai corporations, and therefore their banks.
Indonesia, meanwhile, is still no-go or go-slow till after
elections in June and then November. Hongkong
continues to be bled by its fixed peg to the greenback,
not helped by the risk of further slowdown in China's
economy -- which will likely subject both to repeated
bouts of devaluation rumours.
And stock markets in the region have fallen back from
their highs of the last one year, some in drastic fashion. Taiwan, whose protected currency has been pretty
much spared the worst excesses of 1998, has seen its
key stock index fall back 39 per cent -- from a high of
9,378.52 to yesterday's 5,723.73.
And Thailand's key stock index, compared to 554.71 a
year ago, was 42.2 per cent lower yesterday at 320.36.
How rough things really get will depend on how things
pan out in both Japan and the US. Yesterday, we were
presented with one horrible scenario: The current
Treasury note and bond auctions in the US are going to be a disaster. Their biggest buyers, the Japanese, are
not interested, we were told.
Japanese banks have up to Feb 15 to qualify for capital transfusions from their government. They have
decided, it seems, to take a mega-hit on all their bad
loans this fiscal year -- and then start out with a clean
slate and fresh capital from April. The conclusion:
Massive repatriation of Japanese assets overseas till
March 31. US bonds will collapse, their yields explode,
and the Dow falls freely.
We must hope this does not happen. Like it or not, all
that the world economy has got going for it at the
moment is a free-spending US consumer giddy with
stockmarket profits. The hope is that this will not
change in the Year of the Rabbit.
© Copyright Singapore Press Holdings Ltd, 1999. All rights reserved.
Rakesh Bhandari wrote:
> Can anyone suggest (or download) any readings or analyses to make sense of
> the apparently continuing slide of the Japanese economy and its
> consequences for the Japanese class struggle and the global economy? What
> is the explanation for and significance of the recent rise in long term
> interest rates which the govt has attempted to check?
> rnb