Japanese funds welcome decision to float rupiah

Japanese funds welcome decision to float rupiah

TOKYO (Reuter): Indonesia's decision to float its currency has been welcomed by Japanese funds, helping to reinforce their relatively positive view of the country despite turmoil in Asia as a whole, fund managers in Tokyo said.

And while Japanese funds remain wary about the latest economic trend, none said they had any plans to substantially reduce their Indonesian investment at present.

"The fundamentals in Indonesia are basically strong, so we don't have any specific plans to lower our Indonesian weighting now," said Teru Watabe, general manager of the international department at Asahi Investment Trust.

"There's no need to reduce investment much, because even though growth may undergo a bit of a correction (after the float), there are also expectations of a technical rebound," said Hiroshi Ando, director of the equity fund department at Daiwa Asset Management Co.

Indonesia floated the rupiah on August 14, scrapping a previous system under which the central bank set daily bands in which the currency could trade against the dollar.

By Friday afternoon, the rupiah had fallen to a record low of 2,890 to the dollar. But fund managers took this in stride, noting that Indonesia's economy is more heavily based on exports, making a weaker currency a plus because it makes those products less expensive.

"Although a bit of a drop in the rupiah is inevitable, (the float) is an improvement for Indonesia," Asahi's Watabe said.

"The rupiah will probably fall even more, but they obviously want to promote the rupiah as an export currency," said Daisuke Hiratsuka, deputy chief of the Econometric Analysis and Forecasting Division of the Institute of Developing Economies.

He said further depreciation would offset wage increases as Indonesia develops and keep it competitive as an exporter nation.

"The medium and long-term outlook is quite good. This will probably lead to further growth and could be a stabilizing factor for the economy," he said.

Fund managers agreed, noting that circumstances are different than those of Thailand, which led the way for other Southeast Asian nations by floating the baht on July 2. The Philippines followed about a week later.

The sluggish Thai economy, general market turmoil, and an initial currency plunge in May has caused Japanese investment trust management funds to sharply trim their Thai holdings from 98.9 billion yen in December 1996 to 46.5 billion yen by end-July this year.

But their Indonesian holdings have actually grown, from 41 billion yen in December last year to 48.5 billion yen at the end of July.

Asahi Investment's Watabe said his company began to cut holdings in Thailand early this year and later in the Philippines and Malaysia.

Currently, the weighting of Thailand and the Philippines have been reduced to near zero.

"At this point, among the so-called 'emerging ASEAN' markets of Thailand, the Philippines, Malaysia and Indonesia, I'd say Indonesia seems one of the better prospects," he said

But he added that economic trends deserve further watching, with inflation one of the biggest potential dangers.

A manager at a major fund, who declined to be named, agreed that it is still necessary to be "prudent" about Indonesia.

"We suspected that something like the current turmoil might happen, so earlier this year we reduced our weighting of Indonesia and went overweight on Hong Kong," he said.

But he added that his firm had still launched an Indonesian fund in late May and that they were unlikely to further reduce Indonesian holdings for the present.