November 7, 2008 Friday

Crisis to last 'till mid-2010'

US home prices must recover first: Currency expert

By Fiona Chan

THE financial crisis will not blow over until housing prices in the United States recover and that will not be until mid-2010, predicted currency market expert Eisuke Sakakibara yesterday.

Dr Sakakibara noted that the bursting of the US housing bubble sparked the crisis in the first place by triggering the sub-prime mortgage fallout that eventually brought banks to their knees.

The resulting global recession could last another three or four years, he added.

When the dust settles, the world's financial markets will look 'very different', said Dr Sakakibara, better known as 'Mr Yen' for his ability to move foreign exchange markets, Alan Greenspan-like, during his tenure as financial commissioner for Japan's Ministry of Finance in the 1990s.

Dr Sakakibara is also Japan's former Vice-Minister of Finance for International Affairs and remains one of the world's most influential economics commentators.

'The days of Wall Street and Greenspan are over,' he declared at a luncheon talk organised by financing firm Uni-Asia Finance Corporation at the InterContinental Singapore yesterday.

From being dominated by the financial sector after years of deregulation and financial engineering, the world economy will swing back to focus on the 'real sectors of manufacturing and services', said Dr Sakakibara.

'Many of the funds would be dissolved, and the investment banks would probably disappear. We'll go back to the traditional commercial bank type of relations, and the financial sector will be much more conservative and traditional.'

He anticipates a 'fundamental change in regulations', with more rules imposed on leveraging and risk-taking by commercial institutions.

In the meantime, however, the world faces a simultaneous slowdown of all major economies.

The new Obama administration is likely to announce massive public works and aggressive government spending to help the US economy, he said.

Japan is either 'already in recession or going into recession', with the Nikkei possibly headed down towards the critical 7,000 mark again. At that point, an infusion of capital may be needed in some local banks, Dr Sakakibara said.

'I would not be surprised to see a 40 to 50 per cent decline in the profits of major Japanese companies,' he added.

The unwinding of the yen carry trade is also expected to continue, leading to further strengthening of the yen. If the currency soars back to 90 yen to the US dollar, the 'Japanese government may be tempted to intervene'.

On the bright side, with Wall Street licking its wounds, Dr Sakakibara suggested that Asian financial centres - including Singapore - should seize this chance to grow aggressively and shine. Asia is not facing a crisis as severe as the one in 1997, and its reserves have swelled to provide a buffer.

'Crisis time is also the time for challenge,' he said. 'For countries like Singapore and Japan and so on, which have not been directly hit by the crisis, it may be a good time to take the initiative.'

He added: 'With the fall of Wall Street as a major financial centre, you could develop some sort of Asian regional financial transactions, and Singapore obviously is one of the candidates to be the centre of such regional financing.'

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