Japan and Hong Kong add to global market misery

More gloom in Asia's stock markets yesterday cast its shadow over shares in Europe and the Americas. As the Federal Reserve met to deliberate on whether to raise US interest rates, investors are taking the view that corporate profits will suffer as a result of slower Asian growth. Diane Coyle in London and Stephen Vines in Hong Kong report.

A fleeting glimmer of light in Asian stock markets on Tueday was overshadowed by the more familiar gloom yesterday. With the Japanese stock market hitting a two-and-half year low, and a near 4 per cent fall in Hong Kong share prices, international fund managers were actively selling shares across the region.

The Nikkei-225 in Tokyo fell by almost 3 per cent as the yen continued slipping against the United States dollar. The yen fell to a six- month low, touching 126 to the dollar. The Japanese currency has lost an astonishing 58 per cent in value against the US dollar since April 1995, when it reached a record high of 79.75.

It also reached its lowest level against the pound for five years, with sterling boosted by the prospect of at least one more UK interest rate rise. The pound's index ended 0.6 higher at 104.4, and the currency gained another two pfennigs againsth the German mark.

Shares in Europe fell in Asia's wake. The FTSE-100 index in London ended 73 points lower at 4,720.4. Hong Kong-linked stocks like HSBC suffered particularly.

The Paris and Frankfurt markets declined, too. In France, SGS-Thomson, the tenth biggest maker of semi-conductors, was hard hit by fears that the Asian currency devaluations will give a big boost to its competitors.

Wall Street took up the baton, ahead of the results of the Fed's interest rate meeting. The Dow Jones index was at one stage 88 points down at 7,470.32, although it had regained ground by late morning.

Shares in Latin American markets were particularly affected by the Asian contagion. The Brazilian index was down more than 6 per cent within 35 minutes of opening, while Mexican stocks fell more than 2 per cent in their sixth successive decline.

The almost-daily round of falling share prices as the earth turns on its axis is the result of fears that the continuing loss of confidence and decline in asset values in the Far East will hit growth prospects in other regions. For example, both Ford and General Motors have warned that their overseas earnings will be affected.

It was only a slight comfort yesterday that as a result of the past month's financial market turmoil, almost nobody expected the Fed to increase the cost of borrowing, despite the obvious pressures in America's booming jobs market. Without that background, a rate rise this month or next would have been odds-on.

Nobody is sure how far the fall in Asia's markets will go. Goldman Sachs, the giant investment bank, warned clients yesterday that it was "still premature to bottom-fish in Asia".

The latest concern is that the weakness elsewhere in the region will trigger a full-blown financial crisis in Japan. The steep slide in the yen's value, music to the ears of Japanese exporters, is unwelcome to the government. It is worried about the country's trade surplus, particularly with the US.

But there was no sign of intervention by the Bank of Japan, which last week ruled out the possibility of raising interest rates to support the yen in the meantime. Nor did any Japanese or US officials comment on the exchange rate moves, which analysts said probably reflected the view that exports growth holds out the best hope for Japanese ecoomic recovery.

"Even though there are trade tensions, the exporting sector is the only one showing reasonable signs of growth," said David Brickman of Paine Webber.

Japan's ruling Liberal Democratic Party is due to unveil another economic stimulus package tomorrow, the second in a month, as the Economic Planning Agency unveils its latest monthly report. But foreign investors in the Japanese stock market are becoming increasingly sceptical about the government's ability to tackle the country's economic problems.

Fears of rising interest rate hung heavily over the Hong Kong stock market yesterday, where the blue chip Hang Seng Index closed 396 down on the day at 9,607.91.

Hong Kong's interbank rates are far out of line with prime lending rates. The prime lending rate stands at 9.5 per cent, while banks are having to pay rates of up to 16 per cent to obtain short-term liquidity money from others in the banking system. Analysts are looking for a prime rate rise to around 10.25 per cent before the end of the week.

Elsewhere in the region attention remained focused on South Korea, where the currency slumped to a record low against the US dollar and Tuesday's mini-stock market rally in anticipation of a government economic package petered out. Bangkok workers who lost their jobs after t 58 finance companies closed demonstrated outside the Bank of Thailand, demanding it should take responsibility for their plight. While they were on the streets, investors were optimistic enough to push up share prices by a fraction.