Asian nations seek to calm investors
Saturday, 18 August 2007
Raphael Minder from Hong Kong, Mariko Sanchanta from Tokyo and John Burton from Singapore, FT Syndication Service
Politicians and central bankers across the Asia-Pacific region were out in force last Thursday seeking to reassure investors that a currency realignment and stock market slump would not derail economic growth.
The turmoil on currency markets is drawing particular attention because, should it deepen, it could turn upside down the expectations of manufacturers and exporters, even in countries such as Japan where companies have been basing their earnings predictions on conservative foreign exchange forecasts.
Shinzo Abe, Japan's embattled prime minister, last Thursday urged investors to remember that the "economy's trend is strong" after the stock market closed at its lowest level since November 2006.
The yen strengthened to as much as Y115.71 against the dollar its highest level since March 8. A stronger yen decreases the value of Japanese exporters' dollar-denominated sales when converted back into local currency.
Analysts said at its current level the yen's strength would neither impede the country's economic recovery nor force companies to cut earnings forecasts. But for every Y1 increase per dollar, pre-tax profits decline 0.4 per cent on average for companies listed on the large-cap first section of the Tokyo Stock Exchange, said Shoji Hirakawa, a strategist at UBS, and "the impact is of course larger for exporters".
Robert Feldman, economist at Morgan Stanley, said any impact on exporters' profits of a stronger yen could be offset by cheaper prices for imports such as oil - crucial at a time when the oil price is $70 a barrel.
South Korea's finance ministry pledged to do whatever it could to stabilise financial markets last Thursday after South Korea's won had its biggest one-day drop since October 2006 and the local stock market's Kospi index tumbled 6.9 per cent, notching its steepest point drop in history.
Burhanuddin Abdullah, central bank governor of Indonesia, where the currency has fallen to its lowest level against the US dollar since June 2006, last Thursday pledged to "interventions'' to slow down the drop of the rupiah. His Thai counterpart, Tarisa Watanagase, scotched suggestions that the country might be forced to scrap capital controls introduced last year, insisting that her central bank was "well prepared" to deal with the currency upheaval. After reaching a decade high against the US dollar last month, the Thai baht last Thursday had its biggest one-day fall in five months.
In the short term, the currency realignment is likely to put on hold mooted changes in interest rates from Australia to Japan, according to economists.
The Bank of Japan was expected to consider an interest rate rise at its meeting next week but analysts have in recent weeks begun to play down the likelihood of a move.
In Australia, where the local currency has fallen 6.0 per cent against the US dollar over the past five days, Glenn Stevens, the central bank governor, is expected to quell expectations of another interest rate rise when he appears before a parliamentary committee. Such a move would be a departure from his most recent guidance. After the Reserve Bank of Australia raised its interest rate last week it signalled that it was ready to take further action to contain inflation.
A further unwinding of the carry trade, which has helped depress the yen and inflate currencies such as the Australian dollar, could also benefit exporters in countries such as New Zealand, where the currency has fallen 15 per cent since hitting its highest level as a free-floating currency on July 24.
In the longer run, any currency advantage for Asian exporters could be offset by the impact on the US economy and lower demand there for their goods. "A lot will also depend on whether intra-regional trade holds up, but a slowing US economy could affect that as well," said Adrian Foster, capital markets analyst at Dresdner Kleinwort in Beijing.
Politicians and central bankers across the Asia-Pacific region were out in force last Thursday seeking to reassure investors that a currency realignment and stock market slump would not derail economic growth.
The turmoil on currency markets is drawing particular attention because, should it deepen, it could turn upside down the expectations of manufacturers and exporters, even in countries such as Japan where companies have been basing their earnings predictions on conservative foreign exchange forecasts.
Shinzo Abe, Japan's embattled prime minister, last Thursday urged investors to remember that the "economy's trend is strong" after the stock market closed at its lowest level since November 2006.
The yen strengthened to as much as Y115.71 against the dollar its highest level since March 8. A stronger yen decreases the value of Japanese exporters' dollar-denominated sales when converted back into local currency.
Analysts said at its current level the yen's strength would neither impede the country's economic recovery nor force companies to cut earnings forecasts. But for every Y1 increase per dollar, pre-tax profits decline 0.4 per cent on average for companies listed on the large-cap first section of the Tokyo Stock Exchange, said Shoji Hirakawa, a strategist at UBS, and "the impact is of course larger for exporters".
Robert Feldman, economist at Morgan Stanley, said any impact on exporters' profits of a stronger yen could be offset by cheaper prices for imports such as oil - crucial at a time when the oil price is $70 a barrel.
South Korea's finance ministry pledged to do whatever it could to stabilise financial markets last Thursday after South Korea's won had its biggest one-day drop since October 2006 and the local stock market's Kospi index tumbled 6.9 per cent, notching its steepest point drop in history.
Burhanuddin Abdullah, central bank governor of Indonesia, where the currency has fallen to its lowest level against the US dollar since June 2006, last Thursday pledged to "interventions'' to slow down the drop of the rupiah. His Thai counterpart, Tarisa Watanagase, scotched suggestions that the country might be forced to scrap capital controls introduced last year, insisting that her central bank was "well prepared" to deal with the currency upheaval. After reaching a decade high against the US dollar last month, the Thai baht last Thursday had its biggest one-day fall in five months.
In the short term, the currency realignment is likely to put on hold mooted changes in interest rates from Australia to Japan, according to economists.
The Bank of Japan was expected to consider an interest rate rise at its meeting next week but analysts have in recent weeks begun to play down the likelihood of a move.
In Australia, where the local currency has fallen 6.0 per cent against the US dollar over the past five days, Glenn Stevens, the central bank governor, is expected to quell expectations of another interest rate rise when he appears before a parliamentary committee. Such a move would be a departure from his most recent guidance. After the Reserve Bank of Australia raised its interest rate last week it signalled that it was ready to take further action to contain inflation.
A further unwinding of the carry trade, which has helped depress the yen and inflate currencies such as the Australian dollar, could also benefit exporters in countries such as New Zealand, where the currency has fallen 15 per cent since hitting its highest level as a free-floating currency on July 24.
In the longer run, any currency advantage for Asian exporters could be offset by the impact on the US economy and lower demand there for their goods. "A lot will also depend on whether intra-regional trade holds up, but a slowing US economy could affect that as well," said Adrian Foster, capital markets analyst at Dresdner Kleinwort in Beijing.