Asia concerned about Japan's growth

Asia concerned about Japan's growth

HONG KONG (Dow Jones): It's not keeping Japanese interest
rates at zero that matters to the rest of Asia, it's ensuring
growth in the region's biggest economy rises decisively from that
level.

In that regard, analysts are generally confident Japan's
growth has begun an upward trajectory - that the country is once
again playing a positive role in the region by generating more
investment, tourism, lending and consumption.

The Bank of Japan's decision on Monday to continue holding the
overnight call rate at zero should nurture that process, even
though it's unclear whether a hike would have derailed it,
analysts said.

"They're quite prepared to give recovery a chance," said
Richard Gibbs, an economist at Macquarie Bank Ltd. in Sydney,
welcoming the decision.

Gibbs rejected the notion that holding rates unchanged
suggested the BOJ sees signs of weakness in the Japanese economy
that should worry Asia. Other analysts said that point was
underscored by the lack of change in the dollar-yen exchange rate
after the announcement.

Had there been a rate hike, any impact on the Asian region
would have been felt first and most forcefully through the
foreign exchange market, though it's even tough to know which way
the yen might have gone.

Asian currencies, which track the dollar more than the yen,
have generally been under pressure in recent weeks, mostly due to
the shakiness of economic restructuring and in sympathy with
problems in Indonesia. Since Japan's rates went to zero in March
1999, the yen has climbed 10 percent versus the U.S. dollar,
according to Morgan Stanley Dean Witter & Co.

Rob Subbaraman, an economist at Lehman Brothers Asia Ltd. in
Tokyo, said a big move in dollar/yen in either direction would
cut through Asia.

A sharp weakening in the yen would bring new competitive
challenges for manufacturers in South Korea, Taiwan and
Singapore, he said. Alternatively, a stronger Japanese currency
would have benefited Southeast Asian nations that seek Japanese
investment and tourism, according to the Lehman economist.

No rate change, with no market volatility, is likely the best
option for the Asian region, and was probably what was desired by
policy makers who have remained mum during the months of debate
on the issue in Tokyo.

"The Asian economies are nowhere near fixed now," said
Subbaraman. "Asian central banks are erring on the side of
expansion...and I would think they would hope the Japanese would
be the same."

How much Asia would be affected by higher rates is an
extremely tricky question, analysts said. A recent analysis of
corporate Japan by Ronald Bevacqua, an economist at Commerzbank
AG in Tokyo, suggested a 0.25 percentage point rate hike would
hurt the profits of property and services companies most.

But it would have less impact on manufacturers. And one way of
looking at the results is to assume that the Japanese
manufacturers who have factories around Asia would feel less
pinch to scale back their operations.

Meanwhile, Tim Condon, an economist at ING Barings in Hong
Kong, said the 17-month-old rate policy was originally an
emergency strategy aimed at ensuring against a deflationary
spiral there, and that the market should expect higher rates this
year. "The emergency is over. There is a self-sustaining recovery
in place," he said.

In that case, Asian economies wouldn't have much to fear with
a slight lift in the call rate. "Not if our reading on the
economy is right, and that's unambiguously a good story for this
region," he said.