Governments in Asia are grappling with how best to keep their economies growing as capital flows increase and exchange rates rise. Economists say central banks are bracing for a flood of money as two of the world's largest economies, Japan and the United States, take new measures to stimulate their economies.
This week, Japan's central bank governor, Masaaki Shirakawa, urged advanced economies to continue to stimulate their economies. That means keeping very low interest rates and flooding markets with money to encourage bank lending and consumption.
Japan has cut interest rates to between zero and 0.1 percent and opened a $60 billion fund to buy government bonds and other assets. And the U.S. Federal Reserve indicated it could take a similar action, called quantitative easing, soon.
But economists in Asia worry about the consequences. The big risk is that investors will shift ever more money to higher-return investments in the region, driving up prices for property and stocks, says Song Seng-Wun, chief economist of CIMB bank in Singapore.
"There's going to be a lot more dollars out there, which means more money coming this way, he says. "Governments everywhere know that liquidity will go where they will find yield."
Interest rates in many Asian countries, while relatively low, are still higher than in Japan and the United States so investors make more money here. Funds that are traditionally invested in U.S. treasuries have been moving to Asian bonds. China, which has $2.6 trillion in foreign exchange reserves, nearly tripled its holdings of South Korean government bonds in the first nine months of the year.
But the inflow of capital pushes up the value of Asian currencies, making exports more expensive and jeopardizing economic output. For example, exports account for about half of South Korea's economy and the Korean won is near a five-month high against the dollar.
The yen hovers at a 15-year high despite efforts by the Bank of Japan to weaken it by buying up dollars. In Australia, a boom in commodities has lifted the Australian dollar to nearly par with the U.S. dollar. The Indonesia rupiah is at a three-year high.
Capital inflows increase volatility in the financial markets, says Jeong Young-sik, a research fellow at the Samsung Economic Research Institute in Seoul.
"This capital inflow tends to go to short-term investments and go out as profits are made," says Jeong.
Typically, central banks raise interest rates when there is a lot of money circulating in the system, which can lead to rising inflation. But in many Asian countries, higher rates would attract more funds, pushing up the value of their currencies and hurting exports.
Indonesia and Australia kept rates steady this month, as did the Bank of Korea Thursday.
Jeong says the South Korean central bank has a difficult balancing job. Consumer prices in September rose at an annual rate of 3.6 percent, near the top of its preferred inflation rate.
"(Yet) If they raise the key interest rate, the won would appreciate much more sharply," he points out.
The Korean central bank said it aims to maintain price stability while sustaining economic growth under an easy monetary policy.
The Monetary Authority of Singapore Thursday widened the trading band for the Singapore dollar, allowing greater room for adjustment to balance inflation risks and market volatility.
Song at CIMB says it is not certain the policy mix in Asia will work.
"So countries are doing that and more would be looking at that kind of management in terms of the flows. [People are] just keeping fingers crossed that all these measures would see more balanced flow, and less disruption on the exchange rates, while praying that Uncle Sam's economy will be on even keel and therefore some of the flows will return to the United States," Song says.
The Bank of Thailand will decide next Wednesday whether to raise interest rates from 1.75 percent, the lowest in Asia outside Japan. The Thai baht has strengthened 11 percent this year and Thai exporters warned of layoffs as demand for their products fall.
All of this maneuvering to keep currencies from strengthening and economies growing is sparking international fears of a currency war: a round of competing measures to weaken exchange rates. Japanese officials this week have criticized both South Korea and China for controlling their currencies' rise. And a top U.S. senator, while visiting China this week has pushed Beijing to allow its currency to rise more quickly.