Deeply worried that the slide in the Japanese yen could eventually force China and Hong Kong to devalue their currencies, Beijing yesterday took the unprecedented step of warning Japan to stabilise its economy to prevent a new round of regional devaluations.
Asia's worsening financial crisis pulled down European share values yesterday as concern rose about the knock-on effects on the global economy. The losses followed declines on Asian markets earlier yesterday. Since Japan's economy officially slipped into recession on Friday, the yen has steadily lost ground against the US currency, falling yesterday to a new eight-year low of 144.55 yen to the dollar.
This reduced the value of China's foreign exchange reserves, a quarter of which are in yen. China's growing concern was voiced by Mr Li Peng, chairman of the National People's Congress. "The financial crisis has produced a big impact on the economies of Asian countries and the recent continued devaluation of the Japanese yen has imposed a new pressure on the economies in Asia," he said in a meeting with former Japanese chief cabinet secretary Mr Susumu Nikaido.
Mr Li hoped the Japanese government and other relative departments would "adopt effective measures to stabilise Japan's economy". Since the Asian crisis got underway a year ago, Beijing has repeatedly promised not to devalue the yuan and has earned praise from the US and Europe for bringing some stability to the troubled region.
However, a weak yen makes Japanese goods cheaper in overseas markets while raising the price of imports in Japan and China is worried about becoming uncompetitive. China's leading financial newspapers criticised Japan and the US for failing to halt the yen's slide, saying the two were pursuing their own interests at great peril to Asian economies.
Their inaction made it difficult for China to keep its pledge not to devalue its currency, they warned. US Treasury Secretary, Mr Robert Rubin suggested last week there was little the US could do to prop up Japan's ailing currency, and analysts said the perception that Washington would do nothing to defend the yen gave international currency traders a green light to take the Japanese currency lower, increasing the prospects of a further Asian upheaval.
"The falling yen has already put immense pressure on the Chinese currency, which has stayed firm throughout the south-east Asian financial crisis," warned the Financial News, which is linked to China's central bank. It accused Japan and the US of letting the yen slide so they could pass on their domestic economic problems to other countries.
It said Japan had calculated that an exchange rate of 132.70 yen to the dollar would produce growth in Japan of 0.2 per cent, while a rate of between 144-145 yen would boost it to 1.0 per cent.
The Financial Morning Post accused Japan of abandoning its global responsibility and failing to live up to years of pro-Asia rhetoric. It said the benefits Japan derived from the weaker yen were based on the pain of countries like Indonesia and South Korea. The worsening news from Asia has dented complacency in the West that Japan's problems could be confined to Asia. In Brussels the EU trade commissioner, Sir Leon Brittan said yesterday that if the Japanese yen continued to decline it would clearly put pressure on China's yuan, with "far-reaching consequences for the region and the world economy."
The economies of Europe and the US would have to bear the main brunt of the adjustment of crisis-hit Asian countries, notably through absorbing increased volumes of imports whilst European and US exports declined, he said. Fresh pressure has been building on Hong Kong's peg to the US dollar since the yen fell to above 145 on Friday, with speculators taking positions against the Hong Kong government's resolve to defend the link.
However, some analysts in Hong Kong said that it might be able to withstand the pressure for some months yet. Letting the peg go "is not an option", according to Kevin Chan, greater China economist at ING Barings. Delinking the currency would deepen the downturn in the economy, and lengthen what is expected to be a painful recession, he told Reuters.
Hong Kong was also hit by a rise in local interbank rates and a new unemployment figure of 4.2 percent, its highest level in 15 years. The slide in the yen created strong pressures on regional stock exchanges, with Hong Kong leading the way by dropping almost 6 per cent before a slight recovery to close at 7,462.50. Tokyo's Nikkei 225 closed down 1.31 per cent to 14,825.17.
The South Korea Stock Exchange Composite Index closed at an 11-year low after losing 4.6 per cent. In Singapore, the Straits Times Industrials index ended down 3.54 per cent to close at 1,052.84.
