Financial markets are becoming unhooked from economic fundamentals, officials warned in Japan and South Korea, as policy makers monitor the dangers posed by any Greek exit from the euro region.
“We’ve seen the yen appreciate rapidly from the low-80s to the mid-79 range over a short period of time, those are rough movements,” Japanese Finance Minister Jun Azumi said at a press conference in Tokyo today. “We will watch the currency market with more caution and take appropriate action in a timely manner” if needed, he said.
About $4 trillion has been wiped from global equity markets this month as Europe’s deepening debt crisis threatens the global recovery. European leaders are now openly talking about a possible Greek euro exit after the country’s attempts to form a ruling coalition broke down, prompting Malaysian central bank Governor Zeti Akhtar Aziz to say such an event could cause contagion comparable to the Asian financial crisis.
Asian stocks slid today, erasing this year’s gains, and South Korea’s won weakened after Moody’s Investors Service lowered debt ratings of 16 Spanish banks and a gauge of U.S. manufacturing unexpectedly contracted. The yen climbed to its highest level since February yesterday against the dollar and yields on 10-year government bonds fell to their lowest since July 2003.
The won had its biggest weekly slide in almost eight months and the nation’s Kospi index of stocks dropped 3.4 percent. A weaker won could add to inflationary pressure as imported goods become more expensive, Finance Minister Bahk Jae Wan told reporters in Seoul today.
“The range of fluctuation is excessive,” Bahk said when asked about today’s market movements while noting that economic fundamentals “are strong.” There are no plans for new measures to encourage stability in the markets at the moment, he said later in the day.
In Japan, the yen traded at 79.32 against the dollar in Tokyo after touching 79.14 yesterday. The Nikkei 225 Stock Average (NKY) declined almost 3 percent and the yield on benchmark 10- year government debt fell to 0.83 percent.
Demand for the relative safety of government bonds has disrupted the Bank of Japan (8301)’s operations this week, with its so- called Rinban operation to buy domestic government debt from the market meeting a shortfall for the first time since February 2006. The BOJ accepted 174.7 billion yen ($2.2 billion) in offers to sell debt with less than one year to maturity, below the central bank’s target to buy 310 billion yen of the securities.
Japan’s government raised its assessment of the economy today while warning that downside risks include sharp fluctuations in financial markets and a slowdown in global growth amid Europe’s sovereign-debt crisis.
Greece’s credit rating was downgraded one level by Fitch Ratings yesterday on concerns the country won’t be able to muster the political support needed to sustain its membership in the euro area as leaders began campaigning ahead of the second national vote in six weeks.
“Market participants have used the heightened uncertainty to raise volatility in financial markets,” Philippine central bank Governor Amando Tetangco said in an e-mail to Bloomberg News today. “Risk appetite is weak and flight-to-quality trades will likely be prevalent in the market.”
The Philippine central bank is monitoring “possible effects of deleveraging” in Europe and other economies that may affect domestic funding, Tetangco said. The Southeast Asian nation has “ample” domestic liquidity and “well-capitalized and prudently managed banks,” he said.
“We have room in our enhanced policy tool kit to respond should there be excesses in market movements, and should such movements begin to put our inflation target at risk,” Tetangco said, adding that there may be more volatility in local markets. The developments in Greece this week have deepened the risk of contagion, he said.
Thailand’s banking system has 2.5 trillion baht ($80 billion) of liquidity, five times more than required, central bank Governor Prasarn Trairatvorakul told reporters today. The Bank of Thailand doesn’t see a need to add additional liquidity, which could fuel inflationary pressures, he said.
Investors are shifting to low-risk assets amid concern on Europe’s debt woes and a weakening in the baht isn’t unusual, Prasarn said May 16. The Thai baht is down 0.5 percent this week.
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