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31 December, 2001 The JPY, east Asia & HK |
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The weakness of the Yen, and the likelihood that this will continue in the coming months, has created uncertainties in east Asia.
Economic impact
Actually, the psychological impact of a weak Yen is more serious than the actual economic impact, at least in so far as the Yen's weakness is within a reasonable range.
| (a) | It is not very clear how sensitive exports from other Asian exports would be towards a weaker JPY. Many economies in east Asia do not compete head on with Japan; in fact, they often complement each other as the formation of global supply chains helped to build up many parts producers in east Asia for Japanese manufacturers. Some exports from South Korea and Taiwan do compete head on with Japanese products. But even here, one could argue that Japanese products are very often in a different league as compared with South Korean and Taiwanese products. There are certainly some competitive effects on some east Asian economies at he margin when the Yen weakens. Furthermore, a weaker Yen could also slow down the process of Japanese companies relocating their production offshore and this could have a longer term impact on the growth of exports from other east Asian economies. But the point I am trying to make here is that the extent of such an impact could have been exaggerated. |
| (b) | The impact of JPY weakness on each economy will also depend on whether they are net exporters/importers versus Japan. China, Malaysia and Indonesia have trade surpluses with Japan, while the other east Asian economies have net trade deficits with Japan. For the net importers (such as Hong Kong), a weak Yen will mean that they gain through paying less for their imports from Japan and this helps to offset the loss they suffer due to export competitiveness erosion. |
| (c) | To the extent that the Japanese economy really improves with a weaker Yen, there would also be some complementary effects on the rest of Asia. |
| (d) | In so far as the FDI flows and loans from Japanese banks into the rest of Asia is concerned, there is not much concern in the rest of Asia. Japanese banks have already cut back massively their lending to the rest of Asia since the mid-1990s. Similarly, Japanese FDI is no longer a major force in the region like what it was used to be in the late-80s and early-90s. In recent years, many Japanese companies are relocating their manufacturing activities into China. Such activities are unlikely to be reversed by a weakening of the Yen to say 140. |
Financial market impact
However, irrespective of the actual economic impact, the market would be worried if the Yen keeps on falling to 135 and heads towards 140 against the USD. It is likely that some east Asian currencies would weaken against the USD, and that would raise questions again as to whether the RMB and the HKD would devalue. China has officially raised concern and asked Japan to be "responsible".
On balance, the market believes that China is unlikely to devalue the RMB even if the JPY goes to 140. China's economic fundamentals and the strong balance of payments situation are such that there is little reason for the RMB to devalue at this juncture.
In so far as the HKD is concerned, HKD forwards have remained stable-to-soft in the past 10 days or so, despite all the talks about this subject in the media. The level of activity is also very thin, indicating that there is not very much interest. But this is partly due to holiday effects and one could not conclude too much. Let's wait a few more days and see.
The HKD
While I have said in the past that the HKD link to the USD was no longer sacred under the new Financial Secretary, I don't think it is a good idea for HK to change its exchange rate arrangements under pressure from a JPY at 140, or even 150, particularly if the RMB remains stable against the USD. (To put things in perspective, it should be noted that when the JPY/USD fell from around 120 to 132 in the recent past, the KRW fell by 3.2%, the TWD fell by 1.8% and the SGD fell by 1.2%.)
While the Hong Kong economy remains weak, devaluing the HKD is clearly not a short-cut to reviving Hong Kong's competitiveness and economic vitality. Devaluating the HKD at an uncertain situation such as what we are facing now is to invite disaster.
As long as the HK government manages the situation well, I don't think speculative forces could put too much pressure on the HKD.
The Hong Kong property market
Sentiments in the Hong Kong residential property market have been quite resilient in recent months. Primary market sales are very well received, fuelled partly by low interest rates, partly by active sales strategies of developers, partly by home purchase loans provided by the government, and partly by expectations that the government would introduce changes to its public housing policies soon. There are also signs that some investor demand is coming back to the market.
However, as economic prospects remain lackluster and as the supply of residential flats shall remain high in the coming year, the residential property market is still expected to move sideways in the coming months.
Meanwhile, there are signs that the office property market is softening further.
| K.C. Kwok |
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This memorandum is issued by Standard Chartered Bank and is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Opinions expressed herein are subject to change without notice. This memorandum has been prepared solely for information purposes and for circulation and no responsibility is accepted for use of or reliance on information provided herein. This memorandum does not constitute any solicitation to buy or sell any instrument or to engage in any trading strategy. Standard Chartered Bank, or any company within the group of which it forms part, may have a position in any of the instruments or currencies mentioned. |
