Japan blamed for Asia currency crisis

Japan blamed for Asia currency crisis

HONG KONG (Reuter): Japanese monetary policy is likely to have been the main catalyst for recent speculative attacks on various Asian currencies, most notably the Thai baht, Deutsche Morgan Grenfell (DMG) said in a research report.

"In the past two weeks there has been a radical re-assessment of Japanese monetary policy, perfectly coinciding with the increasing currency pressure," DMG wrote in a weekly research report.

Many Southeast Asian nations are heavily indebted to Japan, a consequence of its cheap yen and low lending rates. Japan's official discount rate has been at a record low of 0.5 percent since September 1995.

In the case of Thailand, two-thirds of its outstanding debt is owed to Japanese banks, suggesting than any increase in Japanese rates will lead to a higher cost of capital for the economically troubled country.

At the same time, the yen has been gaining against the U.S. dollar, eroding some of the yen's massive 50 percent depreciation against the greenback over the past two years.

"Even if the loan rates are fixed, the maturity of the loans is so low as to be rolled-over at higher rates," DMG said.

"How much of this lending is hedged is impossible to calculate given this is carried out through off-balance sheet transactions.

The analogy, of course, is that the Japanese banking system is to Asia (what) the U.S. banking system was to Mexico."

Mexico faced a cash and liquidity crisis in late 1994, which quickly spread to other countries. The probability of such contagion in Asia remained high, DMG said.

Even though coordinated currency intervention by the region's central banks in recent weeks, including the Bank of Japan, appears to have worked in the short term, many Southeast Asian nations cannot cope with high interest rates for long.

"The likelihood is that other currencies will come under consistent pressure," DMG said.

"In recent weeks we have pointed out that the (Indonesian rupiah) carry trade no longer offers value and the Philippines are accumulating excessive net foreign liabilities. Thus the contagion effect on other regional currencies is likely to be far greater than in the Mexico crisis."

A consistent and transparent policy is essential for central banks throughout Asia to maintain credibility, DMG said.

"However, unlike the Tequila crisis imported from Mexico, there is a very real inconsistency in local policy (in Asia).

This must be addressed, otherwise the speculators will return and the crisis will deepen," the report said.

The final outcome must be to achieve lower interest rates, which can only be achieved with a more flexible currency regime, DMG said.