Asia needs careful stimulus exit amid recovery, ADB says

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Asian economies need to time their exit from stimulus policies carefully as the region rebounds this year from the global slump, Asian Development Bank President Haruhiko Kuroda said Thursday.

Removing the measures taken to revive growth too late may spur inflation, he said at an ADB forum in Manila. Asia, excluding Japan, will expand 6.6 percent this year after growing 4.5 percent in 2009, Kuroda said, reiterating a December forecast.

“The timing of exit from policy stimulus needs to be tailored to countries’ individual situations,” Kuroda said. It needs to “take into account inflation risks where output gaps are turning positive as well as debt levels,” he said.

Asia is leading a recovery from the deepest global recession since World War II after policy makers slashed interest rates and governments announced more than US$950 billion of stimulus measures. The region should keep interest rates low even as growth in China, South Korea and other emerging economies may accelerate in 2010, the ADB said last month.

Kuroda said Thursday he doesn’t foresee significant inflationary pressures emerging in Asia.

Still, some Asian central banks are already taking steps to remove the excess cash in their banking system amid concern inflationary pressures will rise. Economies including South Korea and Hong Kong are facing increasing asset prices, consumer credit and corporate loans, spurred by record-low interest rates and government stimulus.

China, Vietnam

Vietnam raised its benchmark interest rate by one percentage point to 8 percent in November, while China this week unexpectedly raised the proportion of deposits that banks must set aside as reserves starting Jan. 18 as a credit boom threatens to stoke inflation and create asset bubbles.

China’s decision was appropriate to contain rising asset prices and more central banks in the region may follow, Kuroda said. Still, the country’s policy remains expansionary, he said.

Low interest rates may prompt companies to borrow cheaply and spend on capital-intensive instead of labor-intensive industries, resulting in a jobless global recovery, Hiroshi Watanabe, president of the state-run Japan Bank for International Cooperation, said at the same forum.

Source: Bloomberg

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