US rate hike ends wait, but not uncertainty for Asia

TOKYO – The Federal Reserve’s rate hike was welcomed in Asia as a sign of strength in the U.S. economy, a major market for the region’s exports. But it might also bring difficulties by complicating Chinese efforts to avoid a sharper economic slowdown and keep the yuan steady.

The U.S. central bank on Wednesday raised the Federal Funds Rate by a quarter percentage point, the first such increase in nearly a decade. The decision ended a long period of uncertainty about when the Fed would begin winding down the easy money era that was ushered in to heal the economic damage of the 2008 financial crisis.

Financial markets had ample time to adjust, yet the long stretch of near-zero interest rates makes the policy change “unprecedented,” said economist Masamichi Adachi of JPMorgan in Tokyo.

“Beyond the market perspective, in the real economy, there are so many uncertainties,” he said, citing China’s slowdown, the slump in oil prices, high levels of corporate debt in developing economies and other factors.

Economists, however, don’t expect a rerun of the market turmoil seen during the 2013 “taper tantrum,” when the Fed’s decision to wind down its asset purchases caused Treasurys yields to soar as investors dumped bonds.

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Asian stocks rose Thursday and some currencies weakened moderately against the U.S. dollar. Investors welcomed the Fed’s signal that increases in interest rates will be gradual.

Of all the countries in Asia, Japan may have the most to gain from the Fed’s shift, since higher U.S. interest rates are likely to push the dollar up against the yen, helping Japan’s exports.

That would also raise costs for consumers and companies that depend heavily on imports, supporting efforts by Japan’s central bank to stoke inflation and reinvigorate the Japanese economy.

At its last policy meeting for 2015, on Friday, the Bank of Japan is expected to hold off on extra stimulus for the economy, which has yet to gain much traction nearly three years after the BOJ launched its own barrage of quantitative easing.

The Fed hike could make it more difficult for Chinese authorities to keep growth in the world’s No. 2 economy from falling below 6.5 per cent. That is the level needed to achieve the government’s goal of doubling the Chinese economy’s size by 2020 from its 2010 level.

Chinese growth has slowed steadily over the past five years as the ruling party tried to steer the economy to a more sustainable expansion based on domestic consumption instead of trade and investment. The slowdown has rippled around the world, affecting economies such as Australia, Brazil and South Korea.

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If Beijing cuts interest rates to support growth that could have the undesirable side effect of accelerating outflows of money, requiring Beijing to spend more of its foreign currency reserves to keep the yuan relatively steady against the U.S. dollar.

Outflows increased even before the Fed’s meeting this week. Analysts estimate November’s capital outflow at $100 billion to $115 billion, up sharply from October’s $37 billion.

“Normalization of U.S. monetary policy should definitely be seen as a headwind for Chinese attempts to ease monetary conditions,” said Logan Wright, director of China market research for Rhodium Group.

But interest rates are not the Chinese central bank’s only tool. Its other options include facilitating more lending by reducing the reserves commercial banks are required to hold.

In India, the rupee has been under pressure, sliding just over 5 per cent against the dollar in 2015, and experts say there may be some capital outflows as markets adjust to the rate hike.

However, given the long lead time for the Fed decision, India is well prepared to absorb the policy shift, said Sreeram Chaulia, dean at Jindal School of International Affairs.

“It’s not going to be an exodus of money from the system. We have cushioned it,” he said.

Reserve Bank of India Gov. Raghuram Rajan said the central bank would supply liquidity as needed.

“We are prepared for any eventuality,” he told reporters last week in Kolkata.

Countries in Southeast Asia will also be monitoring movements in capital.

The biggest concern for countries such as Indonesia and Thailand would be the potential impact on their currencies.

But most countries in the region have enough policy leeway to cope with currency gyrations or capital outflows, Moody’s said in a recent report.

“The region is better prepared than it was, say, during the taper tantrum of 2013,” said its author, Alaistair Chan. “The big question for 2016 is the effects of China’s slowdown.”