Japan's Nikkei Index rose for the third straight day following gains overnight on Wall Street and a week of fluctuation1 amid global worries about a possible U.S. recession. As Naomi Martig reports from Hong Kong, financial analysts2 say concern is steadily3 growing among investors4 and officials in Asia about just how damaging the predicted recession will be.
It has been a very volatile5 week for global stocks. At its low points, China's main stock index in Shanghai dropped to its lowest level in nine months, share prices in Hong Kong and Japan both witnessed plummets6 of more than three-percent, and the dollar continued to hit below that psychological 100-yen mark.
There were also short-lived surges. Stocks in Asia rallied on Wednesday after the Federal Reserve announced an interest rate cut of 75 basis points and two heavyweight U.S. investment banks, Lehman Brothers and Goldman Sachs reported better-than-expected results.
But analysts say expectations of continued decline in the U.S. economy are likely to cause a further deterioration7 of market value because investors in Asia are expecting a possible U.S. recession to last a long time.
Chris Leung, a senior Asia Economist8 with the bank DBS in Hong Kong, says investors and officials in Asia are worried about what impact a U.S. recession can have on inflationary pressure in the region.
"Because the persistent9 weakness is making everything expensive and Asia central banks' interest rate is mostly tied up with the U.S.," he said. "So when U.S. interest rate goes down, Asia central banks have to follow despite rising inflationary pressure."
Low interest rates can accelerate inflation because companies and consumers are willing to spend more and take on more debt when rates are low.
Leung says Asia could see a slowdown in real growth in economic activities, most likely in the external trade sector10. He says if a U.S. recession becomes real, officials in Asia are going to have to find the right balance between growth acceleration11 and inflation.
"If you believe the U.S. is going to weaken a lot further from now, then… the ultimate impact will be inflationary, because of dramatic slowdown in new economic activities," said Leung. "But on the other hand, if you think that the U.S. dollar has a lot more to fall from the current level, then everything priced in U.S. dollar in this part of the world will become even more expensive."
Leung says he believes the U.S. is already in the early stages of recession, and that it could last up to two years.
Earlier this week, the Federal Reserve announced emergency measures to ease the liquidity12 crisis in credit markets. The banking13 system crisis in the U.S. largely began after subprime mortgages were made to homebuyers with poor credit records. Many of them now are struggling to pay their debts because interest rates rose and property values fell.
Japan's Nikkei Index closed less than one percent higher Friday. Most Asian stock markets are closed through Monday for holiday.
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