Rational Exuberance?

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Spoilsport economists may say it's not yet time to reach for the sunglasses, but Asia's economic storm is starting to clear. A brighter outlook for the remainder of 2003 propelled stock markets in South Korea and Hong Kong to 13-month highs last week; even Japan's moribund Nikkei index, which sunk to a 20-year low in late April, has since rebounded 35%. Meanwhile, retailers and real estate brokers in down-and-out Hong Kong say buyers seem to be slowly returning. "The general mood here has improved in the past two weeks," says Hong Kong Financial Secretary Henry Tang, predicting the economy will be "much stronger within a year."

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The region's brighter outlook is partly due to the fact that, after events in the first half of 2003, circumstances not outright painful were bound to seem like relief. The Iraq war and SARS devastated numerous Asian economies. In the second quarter, previously dynamic South Korea slipped into its first recession since the 1998 Asian crisis, while Singapore's GDP shrank by 4.2%—that country's worst quarterly performance on record.

But signs that the U.S. economy is perking up are feeding expectations that Asia's hardest-hit countries may soon see a resurgence in growth led by stronger exports, adding to consumer and business confidence. Japan recently registered a spike in personal spending and business investment; the country may finish 2003 with 2% GDP growth, not roaring but better than previous expectations. Barring disasters such as a major recurrence of SARS, booming China expects 9% growth next year, which will help spur demand for goods made elsewhere in Asia. Not every region is out of the woods; Hong Kong, for example, still faces record high unemployment and a big deficit, and deflation still lurks in Japan. But "we do have a fundamental recovery," says Andy Xie, economist at Morgan Stanley in Hong Kong. And he says it like he means it.