The West’s financial tsunami has hit the East. Asian stock markets tumbled on Tuesday as the reverberations from the collapse of Lehman Brothers Holdings Inc., the sale of Merrill Lynch and Co. and the travails of American International Group Inc. (AIG) rippled across the Pacific. A holiday in most of the region’s markets on Monday delayed—and perhaps magnified—the effect. But longer-term pressures such as a collapse in Japanese consumer confidence and China’s economic slowdown are also undermining markets.
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Many Asian markets plumbed depths not seen for several years. The Hang Seng Index in Hong Kong fell 5% to its lowest for two years, the Nikkei in Japan was down 5% to a three-year low and the Korea Composite Stock Price Index lost 6% to hit its lowest since early 2007. The mainland Chinese market is about 60% below its peak of last year.
Investors’ fears of exposure to the fallen US giants depressed financial stocks most. In Japan, Mizuho and Nomura fell by about 10%. Aozora Bank lost more than 15%, even though it said that its net exposure to Lehman Brothers could be less than $25 million (Rs116.5 crore), against the $463 million reported in the investment bank’s bankruptcy filing.
Severe though the New York shock has been, long-term forces are also rattling Asian markets. Japan’s economy has stalled while inflation is rising. As a result, Japanese consumers face falling real incomes. The government’s consumer confidence index fell for the fifth successive month to 30.1 in August—the lowest level since comparable data were first collected in 1982.
Pointing down: A woman walks past a screen showing the Hang Seng Index in Hong Kong. Stock prices tumbled across Asia on Tuesday. LoSai Hung/AP
Confidence is also being tested in China. The country is caught between accelerating inflation and a strong currency, which are eroding export competitiveness, and slowing economic growth. On Tuesday, the Peoples’ Bank of China, the central bank, cut interest rates for the first time since 2002. The 0.27 of a percentage point reduction means the rate on a one-year loan is now 7.2%.
Other central banks in the region may well follow suit as the policy emphasis switches from fighting inflation to fighting recession. Far from becoming “decoupled”, the East risks catching the contagion spreading from the West.