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Asia Security Monitor No. 29, May 29, 2003
American Foreign Policy Council, Washington, D.C.

SARS and deflation threaten Asian economies

Editor: Al Santoli
Associate Editors: Mahlet Getachew, Christina Perrone

 

 
Editor’s Note: A new round of economic instability that could spread across Asia is being created by the SARS health crisis as well as by the inability to reverse deflationary price-levels in Japan. Deflation is caused by a fall in the general price-level or a contraction of credit and available money. Solutions to these burdens may appear to be outside of governmental control. However, the lack of political reform in China and the reluctance of the Japanese government to implement comprehensive economic reform exacerbates the economic and social stability of the region.

May 8:

China’s Communist Party is worried SARS is impeding economic growth, reports the Washington Post. Beijing announced emergency measures aimed at sustaining its damaged economy, pledging more public spending to create jobs and to support faltering businesses. The China Daily reported the country could run its first trade deficit in a decade. The new economic policies call for increased public borrowing and spending. Financial analysts said the measures could slow the difficult process of restructuring China’s inefficient state factories and cleaning up debt-ridden state banks. The policies might cushion the impact of SARS in the short term, they said, but would be difficult to maintain for long. 

May 17:

The Financial Times reports as Japan becomes more integrated into the global economy, deflation has hit its lowest levels in 35 years. Economic figures show the fastest 12-month fall on record, fueling fears that the Japanese economy could be in a deflationary spiral, which has been happening in Japan since 1995. Companies will try to cut wages to compensate for the lower prices while consumers have less money to spend on goods and services. While some people may be benefiting from the lower prices, the overall impact on the Japanese economy will be disastrous. The issue of deflation has split the Japanese government, with officials disputing its causes and effects. Japan’s Economy and Financial Minister, Heizo Takenaka, said, “Deflation remains severe. While pursuing structural reform we must also press on with efforts to end deflation.”

The Economist reports that in early July the Japanese government will bailout the country’s fifth-largest bank, Resona, with an estimated $17 billion (2 trillion yen). Resona had been inflating its profits by including deferred tax assets – created when a bank has losses, for example by writing off bad loans. The government’s bailout of Resona has generated fears that other Japanese banks may be inflating their reported profits to cover losses, reports the Associated Press. Private savings deposits at Resona have been guaranteed by the government, but the chief economist at J.P. Morgan in Tokyo comments, “It’s only a matter of time before the nation’s big four banks will face similar problems.” Many other banks also include deferred tax assets as a significant portion of their capital bases. In all, the bailout may end up hurting other banks that hold large amounts of debt from Resona’s borrowers.

May 27:

Japan will “meet a fatal fiasco” if it continues to blindly follow US policy, Pyongyang’s official Korean Central News Agency (KCNA) said. “Japan’s act of supporting and shielding the US use of weapons of mass destruction indicates that it will leave no means untried for overseas aggression as the US does,” KCNA said.
 

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