Manufacturers of steel, chemicals and textiles are suffering from the depreciation of the Korean won and other Asian currencies against the dollar by as much 50 per cent over the past three months. Those declines have made the prices of Japanese products on international markets more expensive than those of regional competitors.
The benchmark Nikkei 225 stock average is expected to fall to near 14,000 next week as plummeting Asian currencies drive investors away from basic materials towards electronics exporters expected to benefit from the cheap yen.
"We have to contemplate a fall to as low as 14,200 or even 14,100 ... We'll continue to see a shift away from basic materials towards high-tech leaders like Sony and other trusted first-rate companies," said Yoshio Inamura, manager at Tokyo-Mitsubishi Asset Management.
Last week the Nikkei 225 dropped 263.64, or 1.73 per cent, to 15,258.74. "The impact of Asia as a whole is significant. If the situation remains unchanged, the market will fluctuate around 14,000. Even if it manages to climb back up to 15,000, it'll tumble right back down," said Koichi Kurata, manager at Asahi Mutual Life Insurance.
The economic disarray in Asia has investors fearing for the stability of Japanese financial institutions because they are among the region's principal creditors. Japanese banks hold the largest share of the $100bn in short-term foreign bank debt that Korean banks must repay over the next year.
"Banks have a credit risk lending to Asia, to sovereign or private borrowers, and we should not rule out the possibility of defaults in some cases," said Kiyoshi Tsugawa, chairman of Lehman Brothers Japan.
Japanese bonds are likely to recover as investors watch the continuing tussle within the ruling party and the government over proposed new measures to boost the economy. While the government is committed to cutting deficit and debt, a flow of bad news is making investors concerned it will have to borrow more money to pump into the ailing economy. There will be more talk by politicians of tax cuts and an increase spending on public works in anticipation of the elections for the parliament's upper house.
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