Tetsushi Kajimoto and Leika Kihara
TOKYO (Reuters) – The risk of rapid U.S. interest rate hikes and a surging dollar sparked a debt crisis if Asian Development Bank President Masatsugu Asakawa said on Friday. Japan’s top currency diplomat.
While Asia is far from a crisis, many emerging countries are being forced to raise interest rates to stem capital outflows, but at the cost of a slowing economy, he said.
Unless they raise interest rates, the currencies of emerging Asian economies will depreciate and exaggerate the size of their huge debts borrowed in dollars, Asakawa said.
“This time, the pace of normalization of the Fed’s monetary policy is very fast, and has caused some turmoil in emerging capital markets,” Asakawa, Japan’s former deputy finance minister for international affairs, told Reuters.
“With the U.S. raising interest rates, emerging economies have no choice but to raise interest rates to avoid devaluing their currencies too much,” he said.
Some unease in Asia against the dollar, or at least the pace of it, is already evident.
Japan bought the yen on Thursday for the first time since 1998 to stem its slide. India, Thailand and Singapore have been using dollar reserves to prop up their currencies, while South Korea said on Friday it would work with a major pension fund to limit its dollar purchases in the spot market and prop up the won.
Some regional stock and bond markets also took various forms of intervention to moderate volatility.
Some market participants see Asakawa as a dark horse candidate in the race for success, Bank of Japan Governor Haruhiko Kuroda will end his term next year.
He declined to comment when asked about the prospect of becoming a candidate.
Risks to the Asian economic outlook, such as the impact of slowing growth in China and rapid rate hikes in the US, and post-coronavirus like food security Challenges will be a key topic of debate at ADB’s annual meeting in September 26-30, he said.
Many emerging Asian economies have sufficient buffers, such as ample current account surpluses and foreign exchange reserves, to weather another crisis, Asakawa said. As a last resort, they could use non-monetary policy tools such as capital controls, he added. Control during the Asian financial crisis,” Asakawa said.
“We haven’t. But in the event of a debt crisis, these tools could be one of the options,” he declined to comment, adding that Japan’s rare intervention this week.
Asian policymakers must also prepare for volatile market volatility Prepare to disrupt regional economies.
Volatility is high, so policymakers must pay close attention to actions. They also need to prepare for worst-case scenarios, such as accelerating efforts to promote regional financial cooperation debate,” Asakawa said.
In the long run, emerging Asian countries can make their economies less vulnerable to market volatility by raising taxes and reducing their reliance on markets. “Financing through internal financing rather than external borrowing,” said Asakawa. Social welfare costs are more viable,” he said, adding that introducing or raising a carbon tax could be one of them. options.
Japan, South Korea, China and ASEAN, a group known as ASEAN+3, are stepping up their efforts to advance the Chiang Mai Initiative Multilateralization (CMIM).
CMIM plays a vital role in supporting regional financial stability by allowing member economies, including ASEAN+3 and Hong Kong, to use currency swap lines to secure currencies in need.