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From: yfyap@pop.jaring.my (Yap Yok Foo)
To: sangkancil@malaysia.net
Subject: [sangkancil] Asian tail wags US dog
Date: Sat, 08 Nov 1997 01:45:05 GMT
Organization: Private
Reply-to: yfyap@pop.jaring.my (Yap Yok Foo)
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Asian tail wags US dog
from Financial Times, UK SAT NOVEMBER 8 1997
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Was globalisation really meant to work like this? Certainly something
has changed in recent weeks. For most of this decade the world's
markets have danced to the tune of American capital. But now a series
of small financial earthquakes in south-east Asia has sent
surprisingly large shockwaves through the developed world's markets;
and the reverberations are becoming increasingly hard to rationalise.
Yesterday's renewed fit of nerves in Hong Kong, which rattled Tokyo
and caused Wall Street and London to wobble, is an obvious case in
point. The trouble in the US and Europe was admittedly exacerbated by
stronger than expected US payroll data for October - which the market
fears may lead to higher US interest rates at next week's Federal Open
Markets Committee meeting. Yet the response still looks
disproportionate when the Organisation for Economic Co-operation and
Development secretariat reckons that the south-east Asian financial
crisis will knock 0.2 per cent off the combined growth of the
organisation's members compared with its earlier forecasts. And a
large part of that knock is anyway concentrated in Japan.
Asia's troubles are, of course, real enough. The local difficulty that
started in Thailand was symptomatic of unsustainable exchange rate
policies and poorly supervised bank lending across much of the region.
The fallout in Japan was also understandable. Its degree of economic
integration with the rest of Asia is by now considerable. Moreover,
Japanese banks made a notable contribution to property market bubbles
in south-east Asia which will do serious damage to their balance
sheets.
Japan's current misfortune is that globalisation operates very
selectively in its own domestic markets. The spread between the less
than 2 per cent yield on Japanese medium-term government bonds and the
6 per cent yield on comparable US Treasuries is far greater than
justified by inflation rates in the respective countries.
Currency risk
Currency risk might, at a pinch, justify the non-equalisation of real
rates of return in the global bond market where the comparison is
being made between large debtor and creditor nations. An endemic
creditor could be expected to command permanently lower interest
rates. That is certainly the case with Japan vis à vis the US. Yet
this cannot explain a yield spread of well over four percentage
points. The conclusion must be that the Japanese bond market is in the
grip of a bubble.
In contrast, returns on the Japanese equity market, which have been
out of line with global market valuation yardsticks since the early
1980s, are beginning to equalise. The mechanics of the equalisation
process involve a fall in nominal share prices rather than a
combination of stable share prices and increased inflation. The
downward slide will further damage the banks, which have large equity
stakes in Japanese industry and commerce.
Resumption of growth
The best hope for short-term relief is that the bond market bubble
will be pricked by a more robust resumption of economic growth than
most forecasters now expect. This would in turn boost equities. That
remains very much the optimistic scenario in a decade that has done
few favours for Japan.
In the US, meantime, the gyrations of Wall Street over the past
fortnight suggest that the Asian crisis brought a straw to the back of
an over-bloated camel. Yet equity market losses have been
substantially recouped. Perhaps the best way to rationalise such big
swings is to quote the words of Federal Reserve chairman Alan
Greenspan earlier this year. "We should keep in mind," he said, "that
at these relatively low long-term interest rates small changes in
long-term earnings expectations could have outsized impacts on equity
prices."
What has happened in Asia has had just this sort of disproportionate,
but apparently brief, impact on expectations. But it is not clear
whether the reverberations have settled down, not least because of the
threat that the spate of Asian devaluations will increase trade
friction between Asia and the US.
Could these fluctuations be a hint that the long business cycle that
started back in 1991 is nearing its end? Given the exposure of so many
Americans to Wall Street through retirement savings, a serious
downturn on Wall Street might knock the stuffing out of consumers and
bring the upturn to a halt. But the red light is more often signalled
by monetary policy. Mr Greenspan is still the man to watch.
c Copyright the Financial Times Limited 1997
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