News / Asia

Asian Economies Struggle With Capital Flows, Finance Leaders Warn of 'Currency War'

Asian Economies Struggle With Capital Flows, Finance Leaders Warn of 'Currency War'
Asian Economies Struggle With Capital Flows, Finance Leaders Warn of 'Currency War'

Asian governments are struggling to manage strong capital flows that could threaten their economies. But international finance leaders worry such efforts may destabilize the global financial system.

As the yen neared a 15-year high against the dollar Friday, Prime Minister Naoto Kan said Japan will continue to watch for "excessive" moves in the  exchange rate and will take necessary action.

Japan's central bank recently has stepped into the markets to weaken the yen. A strong yen hurts exports, which are crucial to the country's economic recovery.

But international finance leaders fear market interventions could trigger a cascade of similar actions by other central banks, leading to a "currency war."

International Monetary Fund Managing Director Dominique Strauss Kahn warned Thursday against using currencies as "weapons" to gain trade advantages.

In the past, Asian central banks aggressively managed their currencies. Over the past decade, they did significantly less management, but in recent weeks, currency traders say there have been new signs of intervention.

Song Seng-Wun, chief economist of the bank CIMB in Singapore, says Asian central banks are not trying to stop their currencies from rising. Instead, they are managing the appreciation so it will not be too disruptive to their economies.

"They're just moderating it to make it less destructive and for businesses, more predictable," said Song Seng-Wun. "Because if you allow it to move too fast, it makes planning very difficult, if not impossible."

However, the region's largest economy, China, tightly controls its currency, the yuan. China's trading partners want the yuan to appreciate by 30 percent or more to correct what they say is an undervalued currency. Beijing argues doing so would force many Chinese manufacturers to shut down.

Some economists say Asian central bankers are less worried about export competitiveness than about the dangers of strong capital inflows.

Song says the weak economies in the U.S. and Europe have led investors to move money to more profitable markets in Asia's fast-growing economies. That pushes up prices, including the value of Asian currencies.

In recent days, the Thai baht and Malaysian ringgit hit 13-year highs against the dollar. The Korean won rose to a five-month high, while the Indonesian rupiah neared three-year high.

"It's like the globe is one big tray of water and the flow is going from the side, which is being held up toward the other side, which is Asia," said Song. "So governments are trying to balance trade a little bit, rather than letting the money flowing through make the exchange rate go up very fast, which in turn could attract even more [money]."

The problem with that foreign capital can flow out very quickly in a crisis.

In the mid-1990s, Asia saw large inflows of capital, which was quickly pulled out when economies weakened in 1997. That led to a rapid depreciation of currencies despite intense market intervention by central bankers. The resulting economic crisis led to severe recession and thousands of failed businesses across the region.

Shin Jang-sup is an economics professor at the National University of Singapore and previously was an adviser to the South Korean Ministry of Finance. He says Asian central bankers face a more serious problem today than in 1997.

"Their interest rates are historically low, and if they lower their interest rates further they face inflationary pressure," said Shin Jang-sup. "So it's very difficult. Also, after the Asian financial crisis, they carried out various market reforms to facilitate international flows of capital, so it's very difficult to re-introduce some form of capital control. Also the amount of money is much larger than before."

The International Institute of Finance says $825 billion in capital will flow to emerging markets this year, while the Asian Development Bank says more than $200 billion stayed in Asia last year.

On Thursday in Washington, the IMF's Strauss-Kahn said while capital flows are important to global development, he recognizes the dilemma countries face.

"In the short term, we may not be able to have a revaluation of a currency enough to mitigate the effect of the capital flow," he said. "Then you have prudential action that can be taken. Also, you can accumulate reserves and at the end, as we say for months now, we can understand that some element of capital controls can be put in place."

Given its complexity, Strauss-Kahn says, the best way to address the issue is through cooperation among the Group of 20 nations.

In 1985, Japan, the United States, Germany and Britain signed the Plaza Accord, and allowed the dollar to weaken to help Washington narrow its trade deficit and recover from a severe recession.

Whether a similar international agreement can be cobbled together is among the topics international finance leaders are expected to discuss this week in Washington at the IMF and World Bank annual meetings. Government leaders are likely to also take up the issue at the G20 summit in Seoul next month.

You May Like

Video Migrants Caught in No-Man's Land In French Port

The deaths of hundreds of migrants in the Mediterranean this week has only recast the spotlight on the perils of reaching 'Fortress Europe' More

Video Westgate Mall Attack Survivors Confront Painful Memories

On anniversary of terror attack, survivors discuss how they have coped with trauma they experienced that day More

New Hints That Dark Matter Exists

New evidence from International Space Station hints at existence of dark matter and dark energy More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Migrants Caught in No-Man's Land Called Calaisi
X
Lisa Bryant
September 19, 2014 5:04 PM
The deaths of hundreds of migrants in the Mediterranean this week has only recast the spotlight on the perils of reaching Europe. And for those forunate enough to reach a place like Calais, France, only find that their problems aren't over. Lisa Bryant has the story.
Video

Video Migrants Caught in No-Man's Land Called Calais

The deaths of hundreds of migrants in the Mediterranean this week has only recast the spotlight on the perils of reaching Europe. And for those forunate enough to reach a place like Calais, France, only find that their problems aren't over. Lisa Bryant has the story.
Video

Video Westgate Siege Anniversary Brings Back Painful Memories

One year after it happened, the survivors of the terror attack on Nairobi's Westgate Shopping Mall still cannot shake the images of that tragic incident. For VOA, Mohammed Yusuf tells the story of victims still waiting for the answer to the question 'how could this happen?'
Video

Video Militant Assault in Syria Displaces Thousands of Kurds

A major assault by Islamic State militants on Kurds in Syria has sent a wave of new refugees to the Turkish border, where they were stopped by Turkish border security. Turkey is already hosting about 700,000 Syrian refugees who fled the civil war between the government and the opposition. But the government in Ankara has a history of strained relations with Turkey's Kurdish minority. Zlatica Hoke reports Turkey is asking for international help.
Video

Video CERN Accelerator Back in Business

The long upgrade of the Large Hadron Collider is over. The scientific instrument responsible for the discovery of the Higgs boson -- the so-called "God particle" -- is being brought up to speed in time for this month's 60th anniversary of the European Organization for Nuclear Research, known by its French acronym CERN. Physicists hope the accelerator will help them uncover more secrets about the origins of the universe. VOA’s George Putic reports.
Video

Video Whaling Summit Votes to Uphold Ban on Japan Whale Hunt

The International Whaling Commission, meeting in Slovenia, has voted to uphold a court ruling banning Japan from hunting whales in the Antarctic Ocean. Conservationists hailed the ruling as a victory, but Tokyo says it will submit revised plans for a whale hunt in 2015. Henry Ridgwell reports from London.
Video

Video Russian Economy Reeling After New Western Sanctions

A new wave of Western sanctions is hitting Russia’s economy hard. State-owned energy firms continue to bleed profits and Russia’s national currency plunged to a new low this week after the U.S. and the European Union announced new sanctions to punish Russia's aggressive stance in eastern Ukraine. But as Mil Arcega reports, the sanctions could also prove costly for European and American companies.
Video

Video Belgian Researchers Discover Way to Block Cancer Metastasis

Cancer remains one of the deadliest diseases, despite many new methods to combat it. Modern medicine has treatments to prevent the growth of primary tumor cells. But most cancer deaths are caused by metastasis, the stage when primary tumor cells change and move to other parts of the body. A team of Belgian scientists says it has found a way to prevent that process. Zlatica Hoke has more.
Video

Video Mogadishu's Flood of Foreign Workers Leaves Somalis Out of Work

Unemployment and conflict has forced many young Somalians out of the country in search of a better life. But a newfound stability in the once-lawless nation has created hope — and jobs — which, some say, are too often being filled by foreigners. Abdulaziz Billow reports from Mogadishu.
Video

Video A Dinosaur Fit for Land and Water

Residents and tourists in Washington D.C. can now examine a life-size replica of an unusual dinosaur that lived almost a hundred million years ago in northern Africa. Scientists say studying the behemoth named Spinosaurus helps them better understand how some prehistoric animals adapted to life on land and in water. The Spinosaurus replica is on display at the National Geographic museum. VOA’s George Putic has more.
Video

Video Iraqi Kurdistan Church Helps Christian Children Cope find shelter in churches in the Kurdish capital, Irbil

In the past six weeks, tens of thousands of Iraqi Christians have been forced to flee their homes by Islamic State militants and find shelter in churches in the Kurdish capital, Irbil. Despite U.S. airstrikes in the region, the prospect of people returning home is still very low and concerns are starting to grow over the impact this is having on the displaced youth. Sebastian Meyer reports from Irbil on how one church is coping.
Video

Video NASA Picks Boeing, SpaceX to Carry Astronauts Into Space

The U.S. space agency, NASA, has chosen Boeing and SpaceX companies to build the next generation of spacecraft that will carry U.S. astronauts to the International Space Station by the year 2017. The deal with private industry enables NASA to end its dependence on Russia to send space crews into low Earth orbit and back. Zlatica Hoke has more.
Video

Video Future of Ukrainian Former President's Estate Uncertain

More than six months after Ukraine's former President Viktor Yanukovych fled revolution to Russia, authorities have yet to gain control of his palatial estate. Protesters occupy the grounds and opened it to tourists but they are also refusing to turn it over to the state. VOA's Daniel Schearf reports from Mezhigirya, just north of Kyiv.


Carnage and mayhem are part of daily life in northern Nigeria, the result of a terror campaign by the Islamist group Boko Haram. Fears are growing that Nigeria’s government may not know how to counter it, and may be making things worse. More

AppleAndroid