Wall Street’s Plunge Triggers Dive in Asian Stock Markets
As Asian markets opened sharply lower Monday following the blood bath in U.S. markets last week, economists warned that a hard economic landing in North America would send a sharp jolt through the world’s most populous region.
In Tokyo, the Nikkei index was off 6.6% in afternoon trading, and South Korea’s main share index slid 10%. Elsewhere in the region, markets generally fell 5% to 10% early today.
Economists stress that the U.S. outlook would have to deteriorate well beyond a few days of sharp trading losses before Asia feels much intense pain. But they add that Friday’s stock market slaughter makes such an event more likely.
“If the U.S. goes down the toilet, we’re all in trouble,” said Chris Calderwood, economist with brokerage Jardine Fleming.
Last week ended with the largest one-day point decline ever for the Dow Jones industrial average, the Nasdaq Stock Market and the Standard & Poor’s 500 index, prompting Asia to brace for related turbulence.
Japan--Asia’s largest economy and the world’s second-largest after the U.S.--is potentially vulnerable on several fronts, economists said. After two consecutive quarters of negative growth, the economy has only started to look up and remains vulnerable.
A key concern for Japan and the rest of Asia long-term is that the decline in U.S. stocks could undermine U.S. consumer confidence or even foreshadow an economic slowdown, leading in turn to a sharp drop in U.S. imports from Asia. An estimated one-third of Japan’s exports go to North America.
Many experts believe that Japan’s economy has enough strength to avoid a total nose dive should the U.S. economy deteriorate--provided the U.S. avoids actual recession. Any real U.S. downturn would take months to work its way through the distribution chain, by which time Japan should have a stronger foundation.
A hard U.S. landing “would slow down Japan’s economy,” said Garry Evans, strategist with HSBC Securities. “But it won’t kill it.”
But one thing that won’t help Japan’s markets in the short term was the announcement over the weekend that the benchmark Nikkei stock index will be re-balanced Friday, thereby removing 30 so-called old-economy stocks and replacing them with 30 technology companies. By some estimates, this could knock 3,000 points off the average at current valuations.
“They could not have picked a worse day to go ahead with it,” said Russell Jones, chief economist with Lehman Bros. Japan.
Lower stock prices could also hurt in other areas. “Banks will not expand loans and this could lead to tighter money conditions,” said Hiroshi Kakurai, analyst with Kankaku Securities. “Especially, small and medium companies could be badly hurt.”
Another danger for Japan is currency shifts. If U.S. asset values were to drop sharply, capital would move overseas in search of a safer haven. European and Japanese funds could move into Japan, pushing the currency above the psychologically important level of 100 yen to the dollar. It currently trades around 105. Economists say most Japanese companies are hedged at around 100, but a move to 95 or 90 could undermine corporate profits.
Elsewhere in Asia, the outlook is a bit brighter. Most other Asian economies, finally recovering from the 1997-98 regional currency collapse, are faring better than Japan. But they are smaller and therefore more vulnerable to external blows.
“A real U.S. fall . . . would definitely take the steam off Asia’s export recovery,” said Bill Belchere, regional economist with Merrill Lynch. “This makes it all the more important that . . . financial and structural reforms continue.”
The first to be hit would probably be South Korea, Taiwan and Hong Kong, where more individuals than in Japan are invested in stocks, where exports to the U.S. are high and where high-tech companies have been major economic drivers.
Indeed, even before today’s slide, many smaller Asian markets have slumped in recent weeks as local tech stocks pulled back.
But most Asian economies have relatively low inflation. Most also have large trade surpluses. And many are already undergoing significant financial reforms. These factors should help limit any repeat of Asian contagion, economists say.
China also is seeing some nascent signs of improvement, said Robert Subbaraman, Asian analyst with Lehman Bros. With a better-than-expected first-quarter growth rate of 8.1% and progress in restructuring state-owned enterprises, China’s economy would be likely to weather fallout from a U.S. market crash.
Indonesia and Thailand, which have been slower to recover, appear less exposed because they have less distance to fall. But the Philippines, which has recently suffered from some policy confusion, could be vulnerable, analysts said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Asia’s Markets: What Now?
Most Asian stock markets held up surprisingly well last week despite the weeklong decline of the U.S. Nasdaq composite, though Asian trading ended Friday before the U.S. market crash. A sampling of key indexes:
*--*
Percentage decline through Friday: Last From 2000 Country/index week peak Japan/Nikkei-225 +0.9% -1.9% Australia/All Ord. -2.3% -5.4% Malaysia/composite -2.0% -8.1% Hong Kong/Hang Seng -4.7% -11.8% Taiwan/weighted -10.7%* -13.1%* Singapore/S. Times +1.8% -15.2% Thailand/SET +2.7% -16.9% Indonesia/composite -2.5% -20.8% S. Korea/composite -0.4% -24.4% U.S./S&P; 500 -10.5% -11.2% U.S./Nasdaq compos. -25.3% -34.2%
*--*
* includes results of Saturday trading
Source: Times research, Bloomberg News
*
Hisako Ueno in the Tokyo bureau contributed to this report.
