Monday, April 29, 2024

"Are we about to witness a rerun of the Asian financial crisis?"

Amazingly, both Soros and Mahathir, who were both old in 1997, are still alive.

From the Australian Financial Review, April 30:

Investors are becoming increasingly alarmed as buoyant economic activity and high interest rates in the US risk triggering renewed instability across Asia.

It’s not only investors who are rattled by the prospect of US interest rates remaining higher for longer. Central bankers – particularly those in Asia – are also on edge as the rampaging US dollar weighs on their currencies and risks triggering damaging capital outflows.

The Bank of Japan reportedly intervened in foreign currency markets to bolster the yen on Monday, after the Japanese currency plunged to about 160 yen per US dollar, its weakest level since 1990. Following the intervention, the yen rebounded and was trading at about 156.3 to the US dollar.

Masato Kanda, Japan’s top currency official, hinted at the intervention, saying it was “difficult to ignore the bad effects that these violent and abnormal movements [in currencies] will cause for the nation’s economy”. He said the authorities would continue to respond to wild currency moves.

The BoJ’s intervention comes as investors turn increasingly bearish on the yen, particularly in comparison with the US dollar.

In the first place, they expect that even when the Federal Reserve finally loosens monetary policy, US interest rates will remain relatively high as a result of the soaring budget deficit and the heavy levels of investment driven by America’s green-energy transition and the artificial-intelligence-related appetite for electricity-intensive data centres.

The prospect of continued strong economic activity and high interest rates in the US has triggered huge capital inflows over the past few months, as investors expect US assets to generate stronger returns than elsewhere.

But that’s creating big problems for other central banks, particularly those in Asia.

Although the BoJ is finally moving back from its long adherence to ultra-loose monetary policy – it became the last central bank to abandon negative interest rates in March – it is doing so at a snail’s pace.

Last week, the BoJ kept its key rate steady in the range of zero to 0.1 per cent. Although a weaker yen could potentially boost Japanese economic activity by making exports cheaper in global markets, the Japanese central bank is clearly worried that too sharp a decline in the currency will result in financial instability, as investors and consumers lose confidence in the Japanese economy and shift more of their money abroad.

And the yen’s weakness is clearly weighing on Japanese stocks. The Nikkei 225 index has fallen 7 per cent from the record high it reached last month.

The BoJ isn’t the only Asian central bank grappling with the stronger greenback. Others are worried that a mightier US dollar will push up the price of globally traded commodities such as oil, which are typically priced in the American currency and will lift the interest costs on their US-dollar debt.

Indonesia, China on alert
The Indonesian central bank caught investors by surprise last week when it raised its benchmark interest rate by 25 basis points to a record high of 6.25 per cent to support the currency.

Bank Indonesia governor Perry Warjiyo said global uncertainty had flared up following the US dollar’s resurgence and conflict in the Middle East, and this had warranted an “anticipatory, forward-looking and pre-emptive policy response”.

Although inflation has been within the Indonesian central bank’s target range of 1.5 per cent to 3.5 per cent this year, there is a risk that a weakening rupiah could fan inflation by pushing up the prices of imported food and fuel.

Indonesia is also feeling the chill effects of capital outflows – foreign investors have sold close to $US600 million ($914 million) in Indonesian government bonds this month.

Meanwhile, the Philippines and Thailand are delaying interest rate cuts to avoid destabilising their currencies, and the head of Korea’s central bank, Rhee Chang-yong, has described the won’s weakness as “excessive”. The Korean currency is the lowest it has been since 2022....