Asia’s economic policy makers have a new worry: the cheap yen. The city-state unveiled higher stamp duties and new property lending limits on the same day that Japanese Prime Minister Shinzo Abe launched his $117 billion fiscal stimulus programme. The timing may be a coincidence, but there is little doubt that the Singapore’s policy makers, and their counterparts in rest of Asia, are beginning to view Japan’s sliding currency as a potentially destabilising influence.
For the seventh time in three years, Singapore is trying to prevent its property market from being pumped up with hot money. Previous cooling measures were a response to the US Federal Reserve’s ever-expanding quantitative easing programme. This led to negative real mortgage interest rates, triggering waves of capital inflows into the city-state’s real estate. In spite of the measures, residential property prices have risen 51 per cent since early 2009, feeding into inflation. Meanwhile, Singapore’s trade-dependent economy is teetering on the edge of a recession.
But while the Fed’s easing programme is approaching the finish line, the Bank of Japan’s printing press is just warming up. Following Abe’s prodding, the BOJ may be the most aggressive among advanced-nation central banks in expanding its balance sheet this year, according to Royal Bank of Scotland. There is also talk of deeper coordination between the ministry of finance and the monetary authority, presumably to combine the former’s currency-market interventions with the latter’s money-printing. The yen, already at its lowest in two and a half years, is becoming a one-way bet on depreciation.
With Japanese short-term interest rates likely to remain near zero, assets offering positive yields in appreciating Asian currencies will act like magnets for borrowed Japanese money. Countries with higher interest rates will be especially vulnerable to the so-called yen carry trade, which was previously very popular between 2002 and 2007. Monetary easing is unlikely this year in China, South Korea, Indonesia and Thailand. Nor will India’s eight per cent interest rate fall much, given the stickiness of its inflation challenge. Under these circumstances, policy makers will be wary of excessive flows from Japan. Singapore’s move offers a glimpse of Asia’s likely reaction.
