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IMF Warns That Some Asian Economies Might Be Heading For A Crisis

A news report by BusinessTimes Singapore stated that, earlier this month, during the annual conference of the Asian Development Bank in Tokyo, an IMF official openly warned that Asian countries that utilised stimulus to produce credit-fuelled growth might be heading for a financial crisis. His remarks were eerily reminiscent of similar messages just before the global financial crisis. The scariest thing is, he may not be far from the truth.

In Singapore, we have seen how the property bubble rapidly developed in the past few years. If not for the intervention by the government through cooling measures, we might already be experiencing the aftermath of the property bubble. And this is not unique to Singapore, many other countries across the region are experiencing the same property boom.

However, none of the countries in Asia has engaged in a huge stimulus program as big as Japan. The Japan government has targeted an annual asset purchases through its stimulus package of around 80 trillion yen. This has led to massive appreciation in assets such as its share market which appreciated 57% in 2013. I remembered writing a memo to clear my thoughts on the situation in Japan back in January this year. Here is a snippet of the memo.

Japan is at a very interesting stage. The country is facing a huge fiscal issue, having one of the highest debts in the world. … … Prime Minister Abe seems to think he has the perfect solution. Abenomics requires the country to embark on a massive stimulus program. However, it is worth noting that Japan has an extremely low interest rate and increasing their money supply might most likely increase their inflation rate which will affect the interest rate. Their current interest payment is already around 25% of their total tax revenue. Furthermore, Japan is facing an enormous challenge in the form of its aging population. Most countries counter this problem by opening their doors to immigrants. But due to the country cultural aversion for immigrants, that means they will have a very hard time increasing their GDP domestically, which might affect their tax revenue.

After the massive program, if the government is still faced with a decreasing tax revenue problem and an increasing interest rate problem, their only solution might be to inject additional stimulus. And so the cycle will begin again. The main question that everyone has at the back of their mind is “When will it stop?”

3rd Jan 2014

Companies that have huge exposure to Japan includes Global Logistic Properties Ltd (SGX: MC0), which managed a huge portfolio of logistic facilities in the country. Parkway Life REIT (SGX: C2PU), which operates a large number of healthcare facilities in Japan is also hugely affected by the environment in Japan. Lastly, the newly IPOed Accordia Golf Trust (SGX: ADQU) is also focusing its operation in Japan. Now with Abenomics in question, the world is watching how Japan will handle the situation. For investors in Singapore, it is worth watching now the economy in Japan will affect these companies.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mention above