A trickle of warnings about financial bubbles in emerging markets shows little sign of becoming a flood. But it is becoming more ominous – like a damp stain on the ceiling that gets a little bigger every day.
Now Robert Zoellick, the World Bank president, has intervened in the debate with a few carefully-chosen words, talking of global currency “tensions”, rising emerging market currencies and “the risk of bubbles in property and some commodities”.
Right on cue, the Bank of Japan on Tuesday cut interest rates, in a surprise desperate move to stimulate a stagnant economy. Coming after its recent yen-weakening forex interventions, the BoJ’s action could stoke the very “tensions” that are the object of Zoellick’s concern.
Zoellick told reporters in Washington: “I don’t foresee that we’re moving into an era of global currency wars but there are clearly going to be tensions.”
He added:
Money is chasing yield. It can’t find those yields in developed economies and this is not only pushing up currency values in developing countries… (but) also pushing up prices
in assets with the risk of bubbles in property and some commodities.
As Alan Beattie and Tom Braithwaite report for ft.com, Zoellick was speaking after the The Institute of International Finance, a global bankers’ club, urged the world’s leading countries to agree a new currency pact to help rebalance the global economy.
Last week Guido Mantega, Brazil’s finance minister, warned of the dangers of a “currency war” as countries unilaterally intervened to prevent the appreciation of their currencies. The US has been pressing China to allow its exchange rate to rise faster, while several countries including Japan, South Korea, Brazil and Switzerland, have been intervening to hold their currencies down.
As beyondbrics reported on Monday, the IIF also released its latest forecasts for net flows of capital to emerging markets, which showed a sharp upwards revision for 2010, with the previous estimate of $709bn rising to $825bn. The institute said ultra-low monetary policy in rich countries was rapidly driving money into emerging markets in search of yield, risking destabilisation.
Tough words. But who’s listening? Asian markets on Tuesday were mixed, with profit-taking on Wall Street on Monday pushing some investors to sell down in the region but with others inspired to buy by hopes that Tokyo’s rate cut would boost demand in Japan and the region. The damp patch on the ceiling, it seems, is not yet large enough to upset the markets.
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