Japanese Yen Plummets 57%, US Interest Rates Soar...HSBC "1997 Financial Crisis Déjà Vu"

▲ Japanese Yen (JPY), Semiconductors, Artificial Intelligence (AI)/AI generated image

Signs reminiscent of the 1997 Asian financial crisis have been detected again.

According to CNBC on September 1 (local time), Frederic Neumann, HSBC's Chief Asia Economist, diagnosed that the current market shows trends similar to those of 1997. Rising US Treasury yields, a weakening Japanese yen, and optimism surrounding tech stocks are prime examples. The internet craze of that time has now been replaced by an artificial intelligence (AI) investment boom. However, Neumann drew a line at a simple repeat of the financial crisis, stating, “The differences are greater than the similarities.”

The movements of US interest rates and the Japanese yen are quite similar to that time. The US 10-year Treasury yield surged from 5% in October 1993 to about 8% in November 1994. It also recorded about 7% in April 1997. Recently, it rose from 0.5% in August 2020 to around 4.79%. The Japanese yen also fell from about 80 yen per dollar in April 1995 to 130 yen in April 1997, a depreciation of about 55%. Recently, the yen weakened by about 57%, falling from about 103 yen in January 2021 to 163 yen last July.

The crucial difference lies in Asia's financial situation. In the 1990s, major Asian countries heavily borrowed funds for investment from overseas. It was a structure where the entire financial market could be shocked if dollar procurement costs surged or exchange rates fluctuated. Currently, many Asian countries have shifted to supplying capital overseas. This is why Neumann sees a low possibility of a repeat of the 1997-style financial crisis.

Instead, AI demand has emerged as a new vulnerability. South Korea, Japan, Taiwan, and Singapore are benefiting from increased electronics exports in conjunction with expanding US AI investments. Neumann stated, “Instead of the financial vulnerabilities of the 1990s, Asia is now facing demand vulnerabilities.” He diagnosed that if high US interest rates and funding costs pressure AI hardware investments, Asian exports could also be hit. This means that a slowdown in AI investment, rather than financial distress, has been identified as a new risk factor for the Asian economy.

[Article Key Summary]

-HSBC detected trends similar to those just before the 1997 Asian financial crisis in rising US Treasury yields, a weakening Japanese yen, and the AI investment craze.

-The extent of the yen's depreciation was similar then (approx. 55%) and recently (approx. 57%), but Asia's current financial structure is assessed as more stable than in the 1990s.

-HSBC pointed to weakened Asian export demand due to a slowdown in US AI investment as a greater risk than a repeat of the financial crisis.

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