Asian Markets React to Japan Party’s Setback

Japanese stocks and the yen clawed back from early losses on Monday after the ruling Liberal Democratic Party suffered a huge setback in an election widely seen as a referendum on the government’s ability to pull the country out of recession.

In midmorning trading, the yen traded at 143.40 to the dollar after sinking as low as 144.50. The benchmark Nikkei average--down almost 2% at one point--was down only nominally by midmorning.

Currency and other market traders appeared to be as uncertain as political commentators about whether the LDP’s disastrous showing meant its economic policy initiatives were likely to be put on hold or was actually a harbinger of more aggressive ideas for wresting Japan out of its malaise.

“The currency market is expecting a political vacuum and confusion,” said Tetsuhisa Hayashi, a foreign exchange manager at Bank of Tokyo-Mitsubishi. “The dollar’s rise may not stop at 147 yen unless Japan quickly forms a new administration which would satisfy the general public.”

Japan is Asia’s largest economy, so any slowdown of reform is seen as hindering the recovery of the whole region.

Nervous stock markets throughout the region fell early today, with Hong Kong’s benchmark Hang Seng falling 2.5% by midday.

Malaysia’s key stock index tumbled more than 2% to a nine-year low, while other markets fell 1% to 2%.

Singapore’s Finance Minister Richard Hu said the outlook for Singapore’s economy in the second half of the year is “weak” and was dependent on developments in larger countries in the region, such as Japan.

“With Japan flat on its back, it makes it very difficult” for Southeast Asia’s economies to rebound, said Alan Lim, managing director of Prudential Portfolio Managers Asia.

“It’s possibly the beginning of a north Asia contagion.”

The Australian dollar fell to 60.79 U.S. cents, the lowest it’s been since June 30. “The Japanese situation is of concern, particularly its influence on the Australian dollar,” said Jamie Spiteri, a trader at Shaw Stockbroking in Sydney.

The market effect might have been muted because analysts said Foreign Minister Keizo Obuchi was the front-runner to replace Hashimoto.

His appointment as prime minister, they said, would bring stability to the markets, ensuring some cohesion in policy.

Currency traders said the focus was now on how quickly the LDP can come up with a replacement for Hashimoto and his cabinet.

“It’s natural for the yen to be sold,” said Takeshi Imamichi, a foreign exchange manager at Industrial Bank of Japan. “Japan won’t be able to quickly come up with economic measures during the political vacuum. That’s not a reason to buy yen.”

Meanwhile, U.S. Federal Reserve Board Chairman Alan Greenspan and central bankers from about 30 nations will be in Tokyo today to discuss international monetary and financial cooperation at a meeting of the Bank for International Settlements.

The meeting of the BIS, a “central bankers’ bank” based in Basel, Switzerland, that sets international guidelines for lenders to follow, comes at the same time top financial officials from Russia and Indonesia converge on Tokyo to talk with Japanese government and private-sector officials about new loan commitments to their countries.

* JAPAN ELECTION SURPRISE

Voters stun ruling party. A1