Southeast Asian problems add to pressure on Japan

Southeast Asian problems add to pressure on Japan

TOKYO (AFP): Economic problems sweeping much of Southeast Asia are likely to put further pressure on the Japanese economy in the coming months, with exports to the region particularly in question, economists said yesterday.

"The negative impact of recent Asian currency falls on the Japanese economy is emerging as Japan's exports to ASEAN countries slow -- and are expected to continue slowing," Susumu Kato, chief economist at BZW Securities, said.

Toshio Sumitani, an economist at Tokyo Research Institute, told AFX-Asia that the negative impact of the regional downturn on the Japanese economy would not be "negligible as Japan's exports to the region account for more than 20 percent of the total."

"Exports to Thailand fell about 14-to-15 percent year-on-year in June," Sumitani said.

"Falls in Japan's exports to Indonesia and Malaysia have not been seen yet but are expected to emerge," he said, citing continued declines in the rupiah and the ringgit.

But Sumitani said that such a development may help to contain the rise in Japan's trade surplus as exports weakened.

Japan exports mostly capital goods to Asia, supplying local demand and re-export markets in the United States, Europe and Japan.

To the extent currency weakness feeds through to lower domestic demand in Southeast Asian countries, this would weigh on Japan's economy in coming months, though the impact was difficult to quantify.

Asia as a whole is Japan's biggest single trading partner, accounting for more than 40 percent of Japanese trade, of which the bulk is capital goods, economists said.

"The real threat to Japan stems from the 'second round' effect of the currency turmoil on Asia's domestic economies," said JP Morgan economist Jesper Koll.

"Fiscal austerity programs will curtail both public and private investment and thus imports of capital goods," Koll said.

"Japan's exports are sure to take a hit -- the only question being how severe the slump will be," he said.

Overall, the expected slowdown may exacerbate the build up of inventories, which has been weighing on Japanese growth.

Kato said part of the export slack will be taken up by expected further growth of Japanese exports to the United States and Europe.

"But you cannot expect exports to the U.S. and Europe to continue rising," he said. "Japan cannot afford to keep increasing exports to the U.S. and Europe, because it does not want to rekindle trade friction."

Over the past decade, Japanese industry has shifted much of its production capacity to Asia, to the extent that as many as one in seven Thai's work for Japanese affiliated companies, economists said.

This shift of physical capacity has come as Japan's banks have boosted their position in the region, although the Asian component for Japan's institutional investors is relatively modest, they said.

"But for the banks, Asia now accounts for 70 percent of their foreign loans -- nearly 120 billion dollars," Koll said. "This is more than three times as much as exposure as U.S. banks have to the region. Of these loans, US$37.5 billion is due from Thai borrowers."

Koll said that on a worst-case assumption, that half of all loans to Asia would need to be written off, this could total 1.5 percent of total loans.

While the $16.7 billion International Monetary Fund (IMF) rescue package would help Thailand, Joll said, "Japanese banks will almost certainly have to increase their provisions for bad Asian loans -- a hit that comes at a bad time, given that their domestic loan problems are still far from completely solved."