Lehman Bankruptcy to Have Limited Impact on Asian Markets
While the Lehman Brothers bankruptcy announcement has sent shockwaves rumbling through the U.S. financial community, its impact on the Asian financial markets could be less than earth shattering, despite Lehman’s $1.6 billion in outstanding loans from seven Japanese banks, including Aozora Bank, Mizuho Corporate, Shinsei, the Bank of China, and a Hong Kong-based unit of Citigroup.
Following the announcement, banking stocks across Asia plunged as much as 16%, and, collectively, banks saw their biggest one-day loss since 1987. Adding to weak investor confidence was the fact that Lehman’s Tokyo-based unit, Teikoku Data Bank, filed for bankruptcy at the same time as its parent bowed out. At $32.7 million, Teikoku’s fall was the second largest bankruptcy in Japanese history.
However, in an article from the International Herald Tribune, the affected banks were optimistic about their ability to weather the aftermath of the Lehman buyout, saying that Lehman had overstated the potential losses from its collapse and that through limiting their exposure, their own losses would be manageable. In the meantime, Mitsubishi UFJ Financial Group Inc. and Nomura Holdings Inc. have capitalized on the fall of their overseas rivals and have bought significant shares of Morgan Stanley and Lehman Brothers, respectively.
Overall, the effects of Wall Street’s Jericho on online forex activity has not yet manifested fully. In the realm of currency trading, the yen has seesawed in the past few weeks against other major currencies. As the consequences play out, the impact will become more visible, not only in the forex market but also in the derivatives market, where Lehman had a strong presence.
Yen Value Declines after U.S. Government Takeover of Fannie Mae, Freddie Mac but Gains on Lehman Bankruptcy
The fallout from the heavily speculated government rescue of invalid mortgage giants Fannie Mae and Freddie Mac has already begun. In fact, the toll on the JPY was almost immediate after the announcement that the U.S. Treasury would take over as online trading activity tilted toward a rash of carry trades that sent the JPY to a 109.08 low.
“There were many investors that missed the dollar rally and therefore basically implemented weak long dollar positions and were forced to unwind those positions. A lot of that was initiated from the yen carry trades,” said Paresh Upadhyaya of Boston-based Putnam Investments in a recent Reuters article about how the Treasury’s decision will affect the dollar’s position in online forex trading. In the long term, however, carry trading may become unattractive, especially if commodity prices fall and cause U.S. interest rates to drop along with them.
September has not proved wholly unkind to the euro. The yen gained against the greenback after the Lehman Brothers’ bankruptcy announcement on the 15th.
Japanese Economic Stimulus Plan, Yen Trades Lower
To help Japanese citizens with high fuel and food prices, the government is considering an economic stimulus plan. Speculation has placed the size of the stimulus package around 2 to 3 trillion yen ($18.35 to $27.53 billion in USD), although no formal announcement has been made yet. Some anticipate that it may be as much as 8 trillion yen. The plan will most likely be designed to help farming and fishing businesses struggling with oil prices and support companies that have experienced fallout from rising commodity prices, as well as offer senior citizens expanded medical services and cut back on expressway tolls.
The stimulus may also provide a temporary stay against recession and build strength for the yen in online forex transactions. In late August, the yen fell against the USD, GBP, and EUR (after multi-month highs). The only currency against which the yen saw higher forex trade numbers was the CHF. Yet opposition to the stimulus plan questions whether it addresses the salient issues such as the credit crunch, rising energy prices, and slowing exports that are bearing down on the Japanese economy. Others question whether the stimulus plan is even warranted from an economic standpoint. Although Japan could enter a recession soon, analysts seem to think that it will be mild, helped by strong fundamentals. Unlike in the past, the current economy is more resilient and has suffered less subprime damage than Europe and America have incurred.
South Korea’s Foreign Exchange Reserves Drop in July
The big forex news for the month of July 2008 in South Korea was the huge drop in the nation’s foreign exchange reserves, as reported by The Korea Times. According to the Bank of Korea, forex reserves dropped $10.58 billion from June 2008—the biggest drop in one month since 1971. This put the reserves at a 15-month low.
Sources attribute the decline in reserves to the government’s decision to sell its dollar holdings in order to stabilize the won, curb inflation, and prevent further weakening of the economy. In The Korea Times article, a BOK official explained, “The sharp fall was due to the government’s intervention in the currency market in order to prevent the market from being skewed in one direction.” However, some analysts expressed doubts about the effectiveness of this strategy in the long term.
China’s New Trans-Bank Foreign Currency System
The People’s Bank of China launched its new trans-bank foreign currency payment system in late July 2008, says Shanghai Daily. Although foreign currency is banned from circulation on the mainland, authorities have made an exception for payments such as trade insurance payments between enterprises. The system, which was put into inception in February of 2007, is not open to individuals.
Eight currencies, including the euro, yen, U.S. dollar, and the Hong Kong Dollar are covered under the system, making forex trading quicker and more efficient. Prior to the launch of the system, forex transfers could take up to three days to complete. Thus far, eleven Chinese banks, including Shanghai Pudong Development Bank and Industrial Bank, have joined the system.