Staff writer

The “unexpected” setback to the ruling Liberal Democratic Party in the Upper House election Sunday may keep Asian financial markets volatile for some time to come, Joseph Yam, chief executive of the Hong Kong Monetary Authority, said Monday.

However, the broad direction of the government’s economic policy is clear and appropriate enough to help Japan recover from the current recession and sort out the problems in its banking sector, Yam said.

Yam made the remarks in an interview in Tokyo after attending the Bank for International Settlements conference of central bank governors held here earlier in the day. “Looking at the sentiment in the market, I’m not very optimistic,” he said, referring to the volatility following the election results. “But looking at what exactly you are doing, I’m quite optimistic.”

He said the Japanese government scheme, including the “bridge bank” plan to clean up bad loans held by commercial banks, is the right thing to do. Recalling Hong Kong’s own banking sector crisis in the 1980s, he concurred that decisive action is needed.

Meanwhile, he said the possibility of a yuan devaluation is “zero” in the “foreseeable future” because China has a balance of payments surplus, reserves of US$140 billion, capital controls that are in place and a rapidly growing economy.

Concern that a weaker yen could prompt a yuan devaluation is “only in the minds of those people who are affected by this very permanent sentiment of markets,” he said.

Stability in the yen-dollar exchange rate is paramount to preventing psychologically negative impacts on Asia’s financial markets, he said. Despite the short-term negative impact of volatile interest rates, Yam stressed that HKMA will defend the Hong Kong dollar’s peg to the U.S. currency at any cost for long-term benefits.

“I don’t see any other alternative,” Yam said, citing “worse” alternatives in Thailand, Indonesia and South Korea, whose economies plunged after their governments dropped the dollar peg and floated their currencies.

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