There is real chaos in Asian markets

Asian markets started the week with a sharp decline in stock prices, with the Japanese Nikkei index plummeting to its lowest level in 26 years, as investors fear that even central bank interventions will not be sufficient to prevent a global recession.

On the Tokyo Stock Exchange, the Nikkei index plunged 6.4 percent this morning, to 7,162 points, the lowest level since October 1982. Prices of stocks in the Philippines fell the most, by more than 12 percent. Stock prices in Hong Kong dropped by more than 8 percent, in Taiwan by more than 5 percent, in China by about 2 percent, while the MSCI index of Asia-Pacific stocks, excluding Japan, fell 1.5 percent, to new lows in four years. There was real chaos on the South Korean stock exchange this morning, as the leaders of the local central bank did not cut interest rates by 0.75 percentage points to 4.25 percent at an emergency meeting. Thanks to the radical interest rate cut, the local stock market stabilized, and the KOSPI index rose by more than 1 percent.

“The central bank’s priority is to minimize the crisis’s impact on economic growth and fluctuations in the won exchange rate, which has also helped the stock market,” says Sebastian Barbe, a strategist at Calyon in Hong Kong. The decline in stock prices across almost all Asian markets is due to investors’ fears that central bank measures will not prevent a deep and prolonged recession in the global economy. On the Tokyo Stock Exchange, the financial sector was under the most pressure, as investors fear that banks will have to seek fresh capital in the market to cover massive losses in their portfolios due to the sharp decline in stock prices.

“The problem is that stock prices are falling, and this has nothing to do with derivatives and similar financial instruments. As stocks fall, banks are facing increasing losses in their portfolios,” explains Koichi Ogawa, an analyst at the Japanese fund Daiwa SB Investments. Japanese banks have so far avoided credit losses similar to those recorded by American banks, but they are major shareholders in the largest Japanese companies as this has strengthened the ties between banks and their clients. The value of these stocks in banks’ portfolios was over $250 billion at the end of March. Meanwhile, it has quickly evaporated.

This morning, stock prices of Japanese exporters, such as Toyota and Sony, also fell due to the strengthening yen. Investors are pulling money from the stock markets and investing in government bonds and currencies with lower yields but safer in uncertain times, such as the yen. As a result, the euro exchange rate fell by 0.4 percent this morning, to 118.75 yen. On Friday morning, it was only 113.8 yen, which is its lowest level in six years. Last Friday, the dollar exchange rate even fell below 91 yen, which is its lowest level in 13 years.

The strengthening yen is not favorable for Japanese exporters as it drives up the prices of their products, thus reducing their competitiveness in foreign markets. For this reason, an emergency meeting of the Japanese government was held today, where it was announced that the government would increase financial assistance to banks to nearly $110 billion and tighten measures for regulating trading on the stock exchanges to stop the sharp decline in stock prices.

 As a result, this morning, finance ministers and central bankers of the Group of Seven (G7) issued a joint statement expressing concern about the strong fluctuations in the yen exchange rate and the possible consequences for economic and financial stability. However, analysts say that the impact of this joint statement, as well as the announcement of measures by the Japanese government, will be limited, given the dramatic situation in the markets. Thus, futures indices on European exchanges indicate that a decline in European stock prices can be expected at the start of today’s trading. (H)