Janet Yellen could be excused for feeling whipsawed in Asia. In Tokyo 17 months ago, before taking over as head of the Federal Reserve, Yellen had to defend the U.S.’s monetary largess in front of a gathering of the testy central bankers. Now the region wants the Fed to go slow as it scales back on monetary stimulus.
Rather than fretting about the Fed’s tightening, Asia should be looking at the benefits as the world’s most powerful central bank charts a return to monetary normalcy. These include currency advantages for Asia’s exporters, deflating asset bubbles and focusing governments on organic economic growth and job creation without relying on excessive liquidity.
“Tapering should actually be taken as endorsing a pro-risk environment as it is a confirmation of a strengthening U.S. recovery,” says Simon Grose-Hodge, head of investment strategy for South Asia at LGT Group in Singapore. “That should be good news for Asian exporters, especially if Fed policy also produces a stronger dollar.”
True, there might be some short-term pain. Yellen’s March 19 comment that the Fed may begin lifting its overnight lending rate as soon as six months after it ends its bond purchases sent shock waves through markets. According to Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong, market reactions to the Fed’s moves could “lead to capital outflows which would make debt-financed growth harder to sustain.”
A couple of quick caveats are needed. First, I began interviewing Yellen in the mid-1990s during my Washington days, and have followed her ever since from Asia. She has never struck me as a hawk or a policy maker who’s insensitive to the fallout of Fed decisions a world away. My gut tells me Asia is exaggerating the risks that Yellen will precipitate a repeat of 1994, when the Fed over-tightened and touched off a plunge in fixed-income markets. Second, Japan shows that countries that cut rates to zero have a very hard time raising them. Politics will constrain Yellen more than investors might realize.
The main focus of the Fed’s action is, of course, the U.S. Nothing would stabilize Asia’s economies and brighten its prospects more than a recovery in the biggest economy. That goes for China, too. At $16.2 trillion, the U.S. is about double the size of Asia’s largest economy and the American consumer is still the key to growth there. With Europe underperforming and Japan doing all it can to maintain the yen’s 20 percent drop over the last 15 months, stronger U.S. demand is the best hope for China to maintain rapid growth.
That brings us to Asia’s bubbles. Hot money seeking higher returns has been causing capital flow problems for Asian policy makers ever since Yellen’s predecessor, Ben Bernanke, cut U.S. overnight bank lending rates to zero. All that cash powered gross domestic product gains, pumped up asset prices and increased government tax revenues, making public debt easier to shoulder. As a result, signs of over-heating have appeared across the region and efforts to tamp things down have been ineffective.
Singapore, for example, has capped debt at 60 percent of a homebuyer’s income, raised stamp duties on home purchases and increased real-estate taxes. Hong Kong has boosted the minimum mortgage down payment at least six times since 2010, doubled the stamp duty on deals of more than HK$2 million ($258,000), and imposed an extra 15 percent levy on non-resident buyers. Nothing would calm things down faster than an end to ultra-low rates in Washington and elsewhere.
Not only did all that hot money inflate real estate prices, it also deadened the urgency to modernize important industries and take structural steps to narrow the gap between rich and poor. Complacency ruled when officials should have been improving infrastructure, finding alternatives to wasteful subsidies, restructuring uncompetitive state-owned companies, lowering trade barriers and improving education. Loose monetary policy can’t achieve any of these goals; only forward-looking government policies can.
The list of Asian countries that took advantage of the capital flows of recent years ― such as South Korea and the Philippines ― to retool their economies is a short one. Now, as the Fed prepare to bring borrowing costs to more normal levels, China, India, Indonesia, Japan, Malaysia, Thailand and Vietnam have potent incentives to tend to their weaknesses.
It’s always possible that Yellen’s plan is a disaster waiting to happen. More likely, it’s a chance for Asia to make the future more about sound economics than froth.
By William Pesek
William Pesek is a Bloomberg View columnist. ― Ed.