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So, Asia
finally unshackled itself from the US economy. Riiiight!
Just ask
executives at Mitsubishi UFJ Financial Group Inc. Shares
in Japan’s largest bank fell to a two-year low yesterday
amid losses from the US mortgage crisis. Sumitomo Mitsui
Financial Group Inc. also said it recorded losses in
securities backed by subprime loans.
Financial contagion oozing from the US wiped out the
Nikkei 225 Stock Average’s gains for the year; that
benchmark was down 7.2 percent this year as of
2:14 p.m. in
Tokyo. The Morgan Stanley Capital International Asia-Pacific
Index lost 2.5 percent on Wednesday alone.
Arguments that Asia has decoupled from the US suddenly
look, dare I say, rather subprime.
Yes,
Asia is a very different place than a decade ago.
Banks,
Japan’s
included, are healthier and carry significantly less
debt. On top of that, the region amassed some $3
trillion of currency reserves.
Asia has so much
cash available to fend off crises that government
investment funds are being created to take more
advantage of it.
That’s
just one of the many ironies a decade after Asia’s
financial crisis. Another is how US woes now threaten
Asia, not the other way around. One more is that Asia
may soon be gobbling up distressed US assets, the way US
investors did in Asia in the late 1990s.
First,
though, Asia’s export-dependent economies must gauge
just how much damage their growth will get from the US
troubles.
Exposure
The
focus is on Asia’s indirect exposure to credit-market
woes. The subprime crisis is dragging down derivatives,
like collateralized debt obligations, which became
popular in Asia in recent years and increased the
opacity of markets.
The
problem for Asia is that this is no longer just a
subprime story. While subprime default was the catalyst,
markets are now melting down for a variety of reasons.
Greater opacity means we don’t know where the financial
landmines are planted.
The
bigger question is what a US slowdown will do to the
region. Amid
China’s explosive growth, it’s easy to forget that the
US economy is nearly three times bigger than
Japan’s,
which in turn is nearly twice the size of
China’s,
which is nearly three times bigger than
South Korea’s.
If US
demand hits a wall, growth in Japan, China, Korea and
the export economies of Southeast Asia may get slammed.
The forces of globalization are masking the extent to
which Asia still relies on US demand. Much of the trade
within Asia involves intermediate goods that are used in
the production of other products—many of which go to the
US and Europe.
Smart
money
Optimism
that Asia can stand alone comes from the view that
China
and India together account for roughly the same amount
of global trade—around 20 percent—as the US. That’s all
well and good, but don’t ignore the fact that
Asia’s economies
need US demand to maintain their share of global trade.
China’s
boom is certainly getting headlines, partly because the
global rout has yet to dent its stock rally. Still,
China
is a glaring bubble, devoid of logic and an aberration.
The sense of foreboding in Asia comes partly from how
even Wall Street’s “smart money” got in trouble in
credit markets. Buyout legend Henry Kravis’s KKR
Financial Holdings is counting losses, as are executives
at Goldman Sachs Group Inc., BNP Paribas SA, Bear
Stearns Cos. and others.
How
quickly contagion spread from the US was encapsulated
today by Rams Home Loans Group Ltd. The Australian
lender that went public last month failed to refinance
short-term debt as buyers shunned credit markets.
Japanese banks also are getting hammered by investors,
raising prickly questions about the industry’s health.
Japan angle
The
question is: has the world taken the stability of
Japan’s financial system for granted?
The
whole subprime mess started when investors had to
refinance loans made when the Federal Reserve was
holding US short-term rates at 1 percent to spur growth.
Japan’s
central bank has facilitated the so-called yen-carry
trade. Untold amounts of Japanese currency have been
borrowed at near-zero interest rates and moved overseas
into higher-yielding markets. A surge by the yen as
those funds are brought home could slam Japan’s economy.
When the
“Lost Decade” of the 1990s led to deflation and a series
of banking crises, Japan came under pressure to
strengthen its finances. The government focused on
weakening the yen and holding down interest rates,
effectively exporting a financial bubble. If that bubble
bursts, the world’s No. 2 economy may find itself back
up the creek.
US contagion
Folks in
New Zealand could be excused for thinking the yen bubble
already is bursting. The New Zealand dollar is heading
for its biggest weekly loss since the 1987 stock market
crash as investors slash holdings of high-yield assets
funded by yen loans.
Asia’s
emerging markets are taking particularly big hits. From
Seoul
to Jakarta, risk aversion is increasingly dominating
trading—and the headlines. It’s a reminder that, while
Asia has come a long way, it’s anything but immune to
turmoil in America. |
