Henry C.K. Liu hliu at mindspring.com
Fri Feb 19 12:20:16 PST 1999


Asia's top

borrowers survive

trial by fire


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


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


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

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