South Korea's stocks took a battering yesterday and the Korean won closed at 1139.0 against the dollar, a record low for the fourth consecutive day. Apprehension is now mounting around the world that Asian financial and market turmoil is threatening to slow down global growth.
Seoul stocks dropped nearly 3 per cent yesterday amid concerns about whether the government's emergency financial package could defer intervention on a major scale by the International Monetary Fund (IMF).
The meltdown in Seoul rumbled through other south-east Asian markets yesterday. Malaysian stocks plunged 11 per cent and Hong Kong's Hang Seng index slipped 1 per cent. The Singapore dollar fell to a 43-month low, the Taiwan dollar fell more than 3 per cent and the off-shore Thai baht fell more than 2 per cent. Japanese stocks and currency staged a modest recovery.
Many analysts said yesterday that South Korea, the world's eleventh biggest economy, cannot avoid an IMF bailout, possibly in the region of $80 billion (£53 billion), which would be double that put together for Indonesia two weeks ago. The crisis deepened as the won plunged against the dollar and investors demonstrated little confidence in government proposals to stabilise the financial markets.
The won fell to a record low of 1139.0 to the dollar 15 minutes after opening when trading was paralysed. Shares fell throughout the morning as foreign investors pulled out.
The won has lost 13.4 per cent against the dollar this week since the central bank abandoned its defence of the currency on Monday. Dealers said further drops in the won were inevitable. The bank pumped 2.53 trillion won (£1.48 billion) into the banking system over the past two days and the Bank of Korea plans to supply another 524 billion won to the market to stop the climb in interest rates.
The package of financial reforms was announced by Finance Minister Lim Chang-yuel just hours after his predecessor was sacked on Wednesday. Destined to avoid a credit squeeze and IMF intervention - or delay it until after the presidential elections on December 18th - they include opening the bond market to foreign investors, easing exchange rate limits and encouraging bank mergers.
Mr Lim, a veteran of seven years at the IMF in Washington, said he hoped the stabilisation package would persuade foreign banks to roll over short-term loans and help prevent the collapse of debt-laden banks. He said he would seek help from the US and Japan rather than the IMF.
Tokyo's battered stocks rose 2.9 per cent yesterday, sustaining a rally begun on Wednesday on hopes that public funds may be used to help Japan's ailing banking sector. Mr Kiichi Miyazawa, a former prime minister, told reporters after meeting Prime Minister Ryutaro Hashimoto that the government would grasp a political nettle and instruct the party to study the issue of using public funds to help pay bad loans. Stocks plunged on Tuesday on news that Mr Hashimoto did not plan to intervene.
Analysts believe the continuing instability in south-east Asia, and particularly Japan, has serious implications for the US economy, which has been the engine of growth for Asia in this decade.
The main worry is that Japan's banking system could be pushed into crisis, as Japan's top 20 banks carry some $250 billion in bad loans from the days of the "bubble economy" in the early 1990s.
Japan is the world's biggest holder of US bonds, with holdings in the region of $600 billion. It is the biggest creditor of the US and controls one-third of the world's savings.
If its banks start to sell US bonds, the world bond market could be destabilised, with US interest rates rising, said one Tokyo-based expert. Faced with higher interest rates, less export orders and cheaper Asian consumer goods, US firms could begin a series of lay-offs and wage cut-backs.
Japan's economy, the world's second largest, has stalled for the first time since December 1995, halted by tax rises imposed last April, according to the Japanese Economic Planning Agency (EPA). The EPA minister, Mr Koji Omi, protested that the economy was not in recession and predicted that growth would pick up, but his optimism is not widely shared.
The yen yesterday recovered slightly from near five-year lows against the dollar, but many analysts fear that the turmoil in south-east Asian economies is triggering a much deeper crisis in Japan because it has become integrated into the region's troubled economies.
Japanese manufacturers have moved to south-east Asia to benefit from low wages and have invested significant amounts of capital in neighbouring countries. Asia accounts for nearly half of all Japanese trade.
With the spate of competitive devaluations in the region, there will be less demand for Japanese consumer goods. Sales of Japanese cars, televisions, computers and other electronic goods have fallen by some 60 per cent in Asia, though the weaker yen has encouraged higher sales to developed countries.
Confidence in the economy and currency markets steadily collapsed as Tokyo stocks declined in the lasts month, falling from 17,000 to 15,265. The Nikkei 225 rose slightly above the 17,000 level yesterday and is now almost 11 per cent higher than at the start of the week.
The comeback has been influenced by a package of 120 measures unveiled this week by the EPA to boost the economy. In Tokyo yesterday US ambassador Mr Tom Foley, in the first news conference since his appointment, said sluggish growth in the Japanese economy was a matter of concern for the US, in particular a sharp increase in Japan's trade surplus with the US.
