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.