By Ian Chua and Rosemarie Francisco
REUTERS - Asia is still coming to terms with Japan's massive monetary stimulus programme that has sent the yen reeling to multi-year lows, but there is no sign yet the region's central banks are reaching for the panic button.
Even South Korea, whose key industries compete directly with Japan, did nothing at last week's policy meeting, wrongfooting markets priced for a cut in interest rates. Less surprisingly, Indonesia and Singapore opted for a wait-and-see stance.
The Bank of Japan's new-found monetary radicalism poses a twin challenge for policymakers elsewhere.
A rising currency versus the yen could hurt competitiveness and prompt calls for a rate cut from business. On the other hand, capital inflows generated by the increase in liquidity could be inflationary and argue for a rate rise -- although that could make things worse by attracting more yield-hungry cash.
Central bank sources in Taiwan and the Philippines told Reuters they were on watch, suggesting talk that Asia will scramble to react to the effects of "Abenomics" is exaggerated.
"At the end of the day, we will determine interest policy on the basis of our assessment of the outlook on inflation over the policy horizon," Philippine central bank Governor Amando Tetangco said in response to questions from Reuters by email.
"At the moment, our assessment is that policy settings remain appropriate."
GRAPHIC-Will Abenomics work? http://link.reuters.com/tam37t
GRAPHIC-Yen since 1985 http://link.reuters.com/gan37t
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Japanese Prime Minister Shinzo Abe came to power in December promising bold reflationary polices to shock the country out of two decades of economic stagnation. The Bank of Japan (BOJ) delivered its part in early April, stunning markets by unleashing the world's most intense burst of monetary stimulus.
The BOJ promised to inject $1.4 trillion into the economy in less than two years. That is three times bigger, as a share of the economy, than the stimulus the U.S. Federal Reserve has delivered so far.
To be sure, if Abe's mix of massive money-printing, public spending and reforms reinvigorate the world's third biggest economy it would, in time, be positive for global growth.
But in the shorter-term the unprecedented monetary boost has raised questions about whether the extra liquidity would spill over abroad, driving up currencies or stoking asset bubbles.
ONE SIZE WON'T FIT ALL
It is clear there will be no a one-size-fits-all response across Asia. For countries such as Thailand, a manufacturing base for industries such as auto parts and electronics, a weaker yen is in fact welcomed, given they are a vital link in the supply chain for Japan's exporters.
And for smaller economies, such as Vietnam, with large external borrowing denominated in the Japanese currency, a falling yen also helps lighten their debt burden.
In the last two weeks alone, the yen has dropped more than 5 percent on the dollar and euro. It has also shed about 4 percent against the South Korean won to lows not seen since January 2010.
The sliding yen is heaping competitive pressure on countries such as South Korea, whose electronics and car industries compete fiercely with Japan's.
Yet, the Bank of Korea (BOK) kept interest rates unchanged on Thursday, defying expectations of a cut.
"It's a surprising decision," said Johanna Chua, chief economist at Citi in Hong Kong. "It looks like they will do other policy options. Interest rate is not the only way you can offset the negative growth shock from the BOJ action."
Indeed, the BOK launched a new low interest rate facility to boost lending to smaller technology companies.
HOT MONEY
There is also concern that a flood of money will in time flow out of Japan in search of higher returns elsewhere.
JPMorgan noted Japanese households hold 55 percent of their financial assets of 833 trillion yen in deposits and cash, compared with 14 percent in the United States and 36 percent in the euro zone. Japanese life companies also hold 140 trillion yen in Japanese government bonds (JGBs).
Just the thought that some of this cash may flow abroad is lowering yields across the globe and pushing down the yen.
So far there's no sign of that money. In fact, Japanese investors sold a net 1.145 trillion yen worth of foreign bonds last week, the biggest selling in a year, as they cashed in forex gains at the start of Japan's financial year.
But analysts suspect they will eventually reinvest their money abroad in search of higher yields.
Such expectations have already helped send the yen crashing to multi-year lows against a host of currencies.
In Australia, where the cash rate is already at a record low 3.0 percent, further easing to temper the rise in the local currency could risk stoking an asset bubble.
Following a string of cuts from late 2011 to December 2012, the Reserve Bank of Australia (RBA) has paused its easing cycle this year. Yet it kept its easing bias firmly in place, saying it could cut again if needed given the benign inflation outlook.
"It's all about jawboning the currency really," said Michael Blythe, chief economist at Commonwealth Bank in Sydney.
"If they hint they're done cutting rates, they know markets will immediately start pricing rate rises and that'll just put more upward pressure on the currency. So they'll bend over backwards to send that easing bias message for as long as they can."
In New Zealand, there are signs the housing market is overheating in response to record low interest rates. This has prompted the central bank to warn about tightening sooner than expected, boosting the New Zealand dollar.
NO EASY SOLUTION
If inflows became a serious problem the policy response of some Asian countries might include capital controls.
Back in 2011, countries such as South Korea, Thailand and Brazil were already putting controls on the flow of funds into and out of their countries to protect against the destabilising effects of so-called 'hot money' generated mainly from the Fed's stimulus programme.
This time around, controls could take the form of a ceiling on foreign purchase of local assets, withholding or capital gains taxes and minimum holding period requirements, Frederic Neumann, HSBC's Co-head of Asian Economics Research said.
"The downside is that such moves can hamper the development of local financial markets and lead to regulatory arbitrage. Calibration, too, presents a challenge," he wrote in a report.
(Additional reporting by Jeanny Kao in Taipei; Editing by Alex Richardson)
