Asian markets slide as credit fears spread

Andrew Wood, Jonathan Soble, David Pilling and Song Jung-a
FT.com
Friday Aug 10, 2007

Shares across Asia fell and government bonds rose as European and US worries about subprime loans spilled into the region. The Bank of Japan pumped money into the financial system to boost liquidity and calm markets, following the example of the European Central Bank and the US Federal Reserve.

Other Asian central banks sold the US dollar and tried to reassure markets that any effects of any credit crisis would be limited as exposure to subprime loans in the region is relatively low.

South Korea led the drop in equities, with the Kospi dropping 4.2 per cent to close at 1,828.49. The Hong Kong market lost 2.9 per cent of its value, with the Hang Seng closing at 21,792; afternoon trading ended early as a tropical storm approached the city.

Tokyo share prices tumbled in heavy trading as banks revealed more problems linked to investments in US subprime mortgages.

The benchmark Nikkei average closed down 2.37 per cent at 16,764.09, its lowest level in five months, while the broader Topix index fell 2.96 per cent to an eight-month low of 1,633.93.

Mitsubishi UFJ Financial Group, the world’s largest bank by assets, lost 3.3 per cent on Friday to end at Y1.18m. Its biggest domestic rival, Mizuho Financial Group, declined 1.7 per cent to Y707,000.

Shinsei and Aozora, two smaller Japanese banks floated by US private equity groups, also fell sharply after revealing exposure to the subprime mess. Shinsei declined 9.9 per cent to Y390 and Aozora lost 3.2 per cent to close at Y387.

Nomura, the investment bank which has also been hit by losses related to US subprime loans, lost 4.8 per cent to Y2,080.

Analysts said, however, that Japanese banks are less exposed to subprime loans than most of their US and European counterparts. “Even if these banks write off all their exposure it’s not going to have a major impact,” said Jason Rogers, analyst at Barclays Capital.

Canon, which makes three quarters of its sales outside Japan, fell 3.9 per cent to Y6,240 and Sony fell 3.7 per cent to Y5,780.

The Bank of Japan injected a relatively modest Y1,000bn ($8.5bn) into money markets after the call rate rose to 0.54 per cent against the bank’s 0.5 per cent overnight target. The BoJ, which injected a similar amount one day in June, stressed that Japanese money markets remained reasonably calm.

Bond prices rose as equities fell, pushing the yield on the 10-year JGB as low as 1.70 per cent, though it later nudged back up to 1.725 per cent. Given the international turmoil, futures markets concluded that the central bank was less likely to increase interest rates when the BoJ policy board meets on August 22-23. Swap contracts indicated about a 35 per cent chance of a rise, down from above 50 per cent in recent days.

Richard Jerram, chief economist at Macquarie Securities in Tokyo, said equity traders were exhibiting a “shoot first, ask questions later” approach, with sell-offs of shares of banks that were not necessarily exposed to subprime mortgages.

The yen continued to strengthen as some risk money came back to Japan, but Mr Jerram said the rise from Y123 to Y118 to the dollar over recent weeks was modest. That suggested the speculative part of the carry trade was reasonably small, he said. Notably, however, two of the region’s highest yielding currencies, the Australian and New Zealand dollars, both declined, with the Aussie sliding 1.5 per cent against the US dollar and more against the yen and the Kiwi sliding 2.1 per cent against the US dollar.

John Richards, senior strategist at Royal Bank of Scotland in Tokyo, said market turbulence meant an August rate rise was now ”off the table”.

Central banks in Malaysia, Indonesia, the Philippines and Taiwan sold US dollars to support their currencies against the sale of risky assets.

Monetary authorities of Singapore and Hong Kong said they were monitoring markets but saw no need to inject cash for now. Hong Kong short-term interbank rates jumped as market liquidity tightened. The overnight Hibor was fixed 97 basis points higher at 4.9 per cent.

The Bank of Korea said it would provide liquidity to financial markets should a credit crunch arise due to the US subprime crisis.

”The Bank of Korea is closely watching financial markets and also plans to take swift measures if the call rate rises sharply, such as supplying funds through repurchase agreement deals,” the central bank said in a statement.

The announcement came as the benchmark Kospi stock index tumbled and the South Korean won slid 1 per cent to 931.90 against the dollar, the biggest one-day drop in 10 months. South Korean government 10-year bonds closed up 0.139 at 99.103, pushing the yield down to 5.424 per cent.

Officials from the finance ministry, the BoK and the Financial Supervisory Commission held an emergency meeting Friday to discuss the financial market turmoil. After the meeting, Lim Young-rok, the country’s vice finance minister, told reporters that Korean markets had sufficient liquidity for now, and no injections were needed.

Government officials said that the impact of the US subprime crisis on the Korean economy would be limited because Korean financial institutions’ exposure to US subprime mortgage loans was relatively small.