The 1997 Asian financial crisis culminated in recessions in economies throughout the region, amid market turmoil characterized by currency collapse, capital flight and banking failures.
Now, Asia's financial environment bears some striking similarities to the period immediately before the crisis, according to HSBC's chief economist Frederick Neumann.
Surging U.S. bond yields, a weak Japanese yen and tech optimism dominated the financial environment in the lead-up to the crisis, Neumann wrote in an Aug. 31 note.
Neumann highlighted elevated U.S. Treasury yields as a key similarity with the period before the 1997 crisis. U.S. Benchmark 10-year bonds, for example, climbed from 5% in October 1993 to around 8% in November 1994.
Even in April 1997, yields were at about 7%, some 200 basis points above where they had been four years prior, Neumann noted.
Today, 10-year Treasury bond yields have climbed from a low of 0.5% in August 2020 to around 4.79% early Tuesday.
"Granted, that took six years; but this year alone, the yield has jumped some 80bp since 3.9% in February," Neumann said.
Last month, the U.S. Treasury announced it will target the 10-year to 30-year portion of the market for buybacks. The government will "at least double" the maximum size of its buyback operations, from $2 billion to "at least" $4 billion, the department said.
Another similarity is recent movements in the Japanese yen. In April 1995, the yen was trading at a cycle low of 80 against the U.S. dollar. By April 1997, it had risen to 130 — a depreciation of about 55%.
Today, the yen has weakened 57% from a low of about 103 in January 2021 to a high of 163 in July, before a rare joint intervention from both Washington and Tokyo strengthened the currency to its current levels of about 160. Markets are currently weighing the potential for another intervention.
In the lead-up to the 1997 crisis, markets were gripped by tech optimism amid the advent of the internet. Now, Neumann noted, the AI boom is stoking similar optimism.
But Neumann argued that the differences between 1997 and 2026 "outweigh the similarities."
Most significantly, he said, the majority of Asian economies were importers of capital in the 1990s — meaning they received more investment from abroad than they invested overseas — and had savings that were insufficient to meet their spending commitments.
"Rising USD funding costs, and a wobbly yen that unnerved investors, were thus key catalysts for stress in the region," Neumann said.
Today, Asian economies are exporters of capital and, as such, higher U.S. funding costs and a weaker yen are not major pressure points.
However, this does not mean that the region will be unscathed. The most pertinent issue for Asia, Neumann said, is its dependency on the AI hardware boom in the U.S., which is powering many of the region's economies.
Exports of electronics related to the AI boom have propped up growth in South Korea, Japan, Taiwan and Singapore, he noted.
"Instead of a financial vulnerability as in the 1990s, Asia now faces a demand vulnerability," Neumann said.
If rising U.S. bond yields and funding costs weigh on the AI hardware boom, or the yen unsettles global funding markets, demand for the region's goods could buckle and growth will fizzle, he warned.
