Bullish on Asia

Dec. 21, 2004
Forecasts, once cautious, now project solid upturn for region.

Is the Asian recovery for real? It is if you believe current economic forecasts for the region. For most of the year they've been restrained -- as if the nascent signs of improvement in hard-hit Asian economies were a mirage. In recent weeks, though, the projections have turned unabashedly rosy. As recently as June, for instance, Merrill Lynch & Co. Inc. was estimating 1999 real GDP growth for Japan of minus 1.4% -- better than the -2.8% posted by the region's largest economy in 1998, but still negative. Last month, however, Merrill Lynch revised its GDP forecast for Japan to a plus1.4%. For other Asian-Pacific nations, which collectively showed a minuscule 0.5% growth in 1998, Merrill Lynch foresees even sharper pickup. The Wall Street firm boosted its 1999 growth forecast for this market to 5.1% -- up from a 3.9% projection in June -- and to 5.2% in 2000. Similar optimism comes from another Wall Street giant, Morgan Stanley Dean Witter & Co. Citing the region's "impressive snap-back," a research commentary by the firm predicts that GDP in non-Japan Asia will "approach 6% next year -- or precrisis levels." Most compelling of all, though, is the International Monetary Fund's (IMF) forecast last month of a dramatic turnaround in the collective GDP of four Southeast Asian nations -- Indonesia, Malaysia, the Philippines, and Thailand. IMF's projections of a combined 1.4% growth this year and 3.6% in 2000, both revised upward from last May, is significant because those nations last year bore the brunt of Asia's financial collapse. In 1998 their combined GDP freefall was a staggering -9.8%. IMF also has brightened its outlook for Japan. The Washington-based organization, whose projections often are regarded as conservative, now forecasts a GDP growth of 1% for Japan this year, up 2.4 percentage points from its previous estimate in May; for 2000, it boosted its projection to 1.5%, up 1.2 percentage points from May. The scope of Asia's recovery has "confounded the experts," admits Robert E. Litan, vice-president and director of the economic studies program of Brookings Institution, a Washington think tank. Noting that last spring "there were relatively few optimists" about an Asian turnaround, he says that "in hindsight, a lot of us were too pessimistic. There definitely has been a V-shaped recovery." Asian stock markets have taken notice. As of October, South Korea's Kopsi index was up 50% for 1999, Japan's Nikkei 28%, and Hong Kong's Hang Seng 27%. China's market, meanwhile, had climbed a reported 38%, according to Bridge Information Systems. Will the recovery last? One economist convinced it will is William Overholt, executive director and Asia strategist in the Hong Kong office of Nomura Securities Co. Ltd., Tokyo. "The Asian recovery is robust, not fragile," he says. "It encompasses the entire region. In each country, recovery is being led by a resurgence of domestic consumer demand -- the first domestically driven recovery in modern history. This has raised imports, which in turn have revived neighbors' exports. Thus we have a self-enforcing regional recovery." Agreeing with that assessment is Clive Walcott, a New York-based international economist for Merrill Lynch. Throughout the region, he says, fast-growing nations are reforming their banking systems that had been overwhelmed by massive inflows of capital. "Certain industries also are restructuring by getting rid of noncore units," he observes. Despite its broad sweep, the recovery is particularly remarkable in South Korea, where the central bank last month projected a rousing 8.8% GDP growth this year followed by a 6.4% rise in 2000. "I was an optimist before, but even I am pleasantly surprised by how robust [South Korea's] recovery is," comments Robert Hormats, former deputy U.S. trade representative who now is vice chairman of Goldman Sachs International and managing director at Goldman Sachs Group Inc. "In late 1997 Korea was within a few days of running out of reserves. Now the reserves are approaching $70 billion, so the government has been able to stimulate growth." Ultimately, however, the staying power of Asia's comeback will be influenced by Japan. Analysts disagree on how enduring that nation's recent economic improvement will be. One optimist is Merrill Lynch's Walcott, who is encouraged that excess inventory in Japan's manufacturing sector "has for the most part been corrected" and that another fiscal-stimulus package is looming. Another bull is C.H. Kwan, senior economist at Nomura Research Institute, Japan's largest private think tank, and a visiting fellow at Brookings. The 40% appreciation of the Japanese yen in the last 12 months, he commented at a recent Brookings seminar, not only will help bolster Japan's banking sector, but also will boost exports throughout Asia. More cautious is Yasushi Okada, chief economist in the Tokyo office of Credit Suisse First Boston, a New York-based investment house. He believes that Japan's economic problems rest in the "real economy" and are only superficially related to the finance sector. "Japan was too slow at adjusting to a demand-driven economy and too stubborn to rid itself of its irrational, traditional way of business," he explains, pointing out that many of the country's more traditional industries still face a major shake-up. Cautious, too, about Japan is Gran Lindahl, president & CEO of ABB Group, Zurich. He's encouraged about recovery prospects for other Asian nations because their economies are becoming linked less closely with Japan's. "However," he says, "I have to say that I am very negative about Japan. I don't think [the Japanese] have done the job. I don't know how they can have all those positive statistics [on GDP improvement]. I think it should take three, four, or five years before Japan recovers." Also expressing doubts Edward J. Lincoln, a Brookings senior fellow and Japan specialist. He worries about the "style" of Japan's fiscal stimulus -- an emphasis on public-works spending -- because it's subject to corruption. He also fears that the country's banking reforms are not sufficiently vigorous. Most importantly, he declares, "I'm not sure the Japanese government has the nerve to keep up its fiscal stimulus." A similar lack of follow-through could stall the recovery in the rest of Asia, asserts Clyde V. Prestowitz Jr., president of the Economic Strategy Institute, a Washington think tank. In remarks prepared for a luncheon briefing in Washington, he noted qualms among economists that the recent upswing in economic growth may lead to complacency and a retreat from structural reforms throughout the region. "Achieving long-term economic growth," he said, "mandates comprehensive reforms that have yet to be implemented." John S. McClenahen in Washington, Tanya Clark in Tokyo, and Tonya Vinas in Cleveland contributed to this article.

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