The mighty engine of Asia-Pacific’s economic growth is running into a few road bumps this year.

Exports are slowing in several countries as demand from developed markets remains weak and China, the region’s lead driver, starts to decelerate.

Meanwhile, Japan is on the rise again, but whether it is doing so as collaborator or competitor remains unclear. Asia has viewed the yen’s sharp fall with equal parts hope ― for the spillover benefits of revived Japanese growth ― and fear that a weak yen will make their exports less competitive and trigger a surge of capital inflows from Japan.

Against this backdrop, the region’s export-dependent countries are coming under pressure to dampen their own currencies and boost flagging growth.

South Korea and Australia led the way this month with unexpected interest rate cuts of 0.25 percentage point each, sending both their currencies down against the greenback.

India and Vietnam were hot on their heels, with rate reductions of 0.25 percentage point and 1 percentage point, respectively.

Economists expect more central banks to jump on the rate cut bandwagon in the coming months, as both exports and inflation show signs of cooling, and in response to Japan’s aggressive monetary easing.

Lower interest rates tend to cause a depreciation in the exchange rate because foreign investors withdraw their money to seek higher returns elsewhere. A cheaper currency in turn makes a country’s exports more attractive.

Meanwhile inflation, which higher interest rates help counter, is also retreating, thanks to lower commodity prices. This is providing a conducive environment for rate cuts ― or at least a good excuse for doing so, says HSBC economist Frederic Neumann.

“The relatively benign outlook for headline inflation has encouraged a number of central banks to cut rates, although the impression lingers that such steps were at least in part motivated by the need to ease pressure on lofty exchange rates,” he says.

UOB economists, led by Jimmy Koh, believe this trend will continue in the coming months.

“We may yet see further expansionary monetary policy bias elsewhere in the near future as the central banks join the race to the bottom,” they say.

“Indeed, a ‘silent’ currency war may already be underway.”

Since the Bank of Japan announced fresh money-printing policies in April ― sending the yen tumbling and making other Asian exporters look less competitive in comparison ― at least 13 central banks worldwide have cut rates, the UOB economists note.

South Korea, for one, cut interest rates on May 9, after its exports climbed just 0.4 percent in April over a year ago.

The country’s currency has risen 10 percent this year against that of Japan, its main export rival.

This has made South Korea’s exports more expensive to Japanese buyers and less competitive to other countries that choose between shipments from South Korea and Japan.

“We are closely monitoring the yen’s moves, and we are really concerned about the negative impact of a weaker yen on our real economy,” a South Korean finance ministry official told the Wall Street Journal after the rate cut, asking not to be named.

Three days before South Korea’s move, the Reserve Bank of Australia reduced its benchmark cash rate to a record low, prompting the Australian dollar to drop against both the greenback and the yen.

The resource-rich country has been hit by a patch of soft growth as its strong currency hinders export demand and its key mining sector suffers from the recent drop in commodity prices.

Meanwhile, other countries are looking to dampen currency strength by other means, say the UOB economists.

New Zealand has been selling local dollars to push down its exchange rate while Thailand and China are looking into measures to curb capital inflows and, by extension, the strength of their own currencies, they add.

Credit Suisse economist Robert Prior-Wandesforde expects other Asian economies to lower interest rates to stimulate exports.

He tips further rate cuts in India and Taiwan, both of which turned in lower-than-expected growth in the first quarter of this year. In Taiwan, exports dropped 1.9 percent in April over a year earlier.

Rate reductions are also possible even in “hot” economies such as the Philippines and Thailand, Prior-Wandesforde said.

Thailand’s economy shrank across the board in the first quarter of the year and exports to Japan slipped 0.9 percent year-on-year in April, against the Thai baht’s rise of about 20 percent against the yen so far this year. About a tenth of Thailand’s exports are bought by Japan.

In fact, the only Asian economy to have tightened monetary policy this year is Singapore, say Barclays economists.

Last month, the Monetary Authority of Singapore opted to let the currency continue to gradually appreciate against those of the country’s major trading partners.

This was deemed the most appropriate stance given higher inflation than the historical average, which a stronger Singdollar mitigates against.

But the currency’s strength dampens export demand and comes as Singapore’s shipments have vastly underperformed global exports since the beginning of last year, notes Barclays Singapore economist Joey Chew.

She analysed the export performance of 44 advanced and emerging economies and concluded that Singapore’s exports “have lost competitiveness and global market share since emerging from the global financial crisis”.

“Exports from Korea and Taiwan, the other newly industrialized economies in Asia, have stagnated, but still did relatively better than Singapore,” she adds.

It is likely no coincidence that the real exchange rates of the Korean won and Taiwan dollar have fallen from their pre-crisis levels while the Singdollar, by contrast, has risen sharply, Chew says.

Recent data showed that Singapore’s exports improved in April, but remained under water with a decline of 1 percent compared with a year earlier. The overall economy, however, strengthened slightly in the first quarter of the year, beating expectations.

But even as the pressure mounts on Asian economies to cut rates and stimulate their flagging exports, some economists argue such a move might prove unwise in the long term.

This is because low interest rates encourage borrowing, something Asian households and companies have been merrily engaging in over the past few years.

Debt levels have risen at a double-digit rate in several Asian countries and are outpacing nominal economic growth in all of the region’s major economies except Thailand, says Nomura economist Rob Subbaraman in a recent report.

“Apart from India, we would view further monetary easing (in Asia) as a policy mistake,” he says.

“The lesson from the global financial crisis is that it would be a mistake to focus solely on the business cycle and (low) inflation, while ignoring the build-up of medium-term vulnerabilities” such as growing debt levels.

With the current growth slowdown in Asia being seen as a temporary blip, central banks should not react too hastily, Subbaraman suggests.

“In our view, another round of rate cuts by Asian central banks is unnecessary and would only increase the likelihood of a sudden and sharp reversal of policy rates further down the road,” he adds.

By Fiona Chan

Fiona Chan is senior economics correspondent at the Straits Times in Singapore. ― Ed.

(The Straits Times/Asia News Network)