Japan's lower rates good for some Asian economies

Japan's lower rates good for some Asian economies

HONG KONG (Reuter): Japan's cut in interest rates yesterday and the weakening of the yen in recent months should provide a boost to some Asian economies, analysts said.

The two factors will result in higher capital inflows into other Asian nations and lower service costs for yen debt, they said in interviews with Reuters.

"I expect it will be pretty positive for our market. We'll get a direct trade effect and a capital inflow as well," said Nigel Douglas, chief economist at Merrill Lynch Australia.

"Japanese investors will be looking for places where there is a high yield, like Australia," he added.

The yen has been falling against the dollar since April 19 when it hit a high of 79.75 to the dollar in intra-day trade in Tokyo. Yesterday, the dollar rose briefly above 100 yen but soon fell back.

The benefits to Japan's regional neighbors are not only limited to yield-hungry investors.

A source close to the Indonesian central bank said the weaker yen would help relieve the burden of yen debt repayments.

Some 40 percent of Indonesia's US$100 billion equivalent debt is denominated in yen, but in fact Indonesia's yen-denominated debt is long-term, some of it even has a 30-year maturity.

Debt payment

"We paid our debt, principal and interest a bit higher when the yen was strong. But now we pay less in dollar terms. It's leveling off," the source said.

Analysts said Indonesia also is still relying on capital goods imported from Japan. "The weaker yen is positive to this import structure," the source noted.

The economists and analysts do not expect the weaker yen to put off Japanese firms from investing abroad.

Hong Kong will remain a beacon for Japanese investment because it is that country's entry point into China, where labor costs are considerably lower than in Japan.

"They haven't come in just because the currency was so strong," said Enzio von Pfeil, Asia sectoral strategist for SBC Warburg. "It is the north Asia banking center. It (Hong Kong) is their window into China."

In Malaysia, the burgeoning trade deficit, which has triggered fears of an overheating economy, is expected to get some respite from the weakening yen.

According to economists, the yen's decline would make the country's imports cheaper. Nearly 30 percent of Malaysia's imports come from Japan, its biggest trading partner.

"This would help reduce the current account deficit somewhat," said Kevin Chew of Barings Securities.

He also discounted fears that Japanese companies would reverse plans to relocate to the region because of the currency situation. "They are here to also tap the domestic markets of the region," he said.

In Singapore, economist Bernhard Eschweiler at J.P. Morgan said the latest move by the Japanese authorities would have little impact on the trend of long-term foreign direct investments by Japanese corporations.

"To remain competitive they will continue to invest directly aboard," he said.

But there would be an impact in the short-term, analysts said.

Eschweiler said the interest rate cut was just a part of Tokyo's push to encourage Japanese funds and investors to go abroad to emerging markets.

"They want their domestic investors to go abroad and invest to weaken their currency," he said.