William Pesek Jnr: Six economic scenarios for Asia 2006

Call it the prediction itch, a phenomenon that grows out of the media's sense of duty to presage the next 12 months.

In Asia, though, no one really has a clue what's in store this year for this increasingly eclectic, cacophonous and unpredictable region.

Who, after all, would have expected South Korean stocks to surge 57 per cent last year while the Dow Jones Industrial Average was almost unchanged? Or that a recovering Japan would see the yen slide 13 per cent versus the US dollar? Or that China's growth wouldn't slow, but accelerate?

Well, here's a prediction anyway - of six themes confronting Asia in the next 12 months.

* Slow and small Chinese revaluations.

A year ago, many confidently said the yuan would move sharply higher. Beijing barely budged.

Expect more conservatism. China's disclosure last month that its economy was 17 per cent bigger than estimated will embolden US politicians demanding a stronger yuan.

Don't count on this new superpower bowing to pressure by the wealthy Group of Seven nations. China's revaluations are likely to be smaller and more gradual than investors and politicians would like.

* Higher interest rates.

Reluctance to risk stifling Asia's economic recovery prompted local central banks to avoid slamming on the brakes last year. Even as the Federal Reserve steadily boosted US rates, Asian policymakers held firm.

That changed in the last 30 days of the year as central banks in Hong Kong, Indonesia, Malaysia, Sri Lanka, Taiwan and Thailand raised rates.

Expect more dramatic steps to blunt the effects of higher oil prices and rising demand. It could lead to volatile trading.

* Debt may be a big story.

Once central banks get short-term rates to more appropriate levels, bond yields may stabilise and begin drifting lower. That could offer capital gains for investors as bond prices creep higher.

Concerns that Asia's stock markets are running ahead of improvements in underlying corporate profits also may help bonds.

Asian stocks had an impressive year, rising 22 per cent in US dollar terms. The wild card is the state of the US consumer, who is still a deciding factor for many Asian economies. Any drop in US demand would be bad news for Asian stocks but good news for bonds.

* Geopolitics may trump economics.

When you consider the biggest surprises in Asian markets in recent years, most came from politics, not gross domestic product. Expect more of the same.

Japan, China and South Korea, East Asia's three biggest economies, are barely on speaking terms amid risks such as high oil prices, bird flu, poverty and disputes over a variety of energy-rich islands.

Tensions between nuclear powers India and Pakistan, meanwhile, never seem far from the surface.

Taiwan President Chen Shui-bian seemed to up the stakes with China in his New Year's Day speech, focusing more on a new constitution than closer ties with the mainland.

In the Philippines, President Gloria Arroyo hasn't silenced critics calling for her ouster amid claims of vote-rigging and corruption. Terrorist threats continue to cloud Indonesia's outlook. Thailand is vulnerable to higher energy prices should events in the Middle East worsen. And never rule out North Korea as a source of instability in Asia markets.

* The yen is set to rise.

While 2005 was a down year for the yen, this year may see Asia's dominant currency head higher. It would make perfect economic sense. Japan is recovering and foreign capital won't be far behind.

A surging yen is probably the last thing officials in Tokyo want as Japan is getting its groove back. That will be particularly true if China delays boosting the yuan.

A firmer yen may encourage governments to let their currencies rise, too. Japan's policy of restraining yen advances has long encouraged Asian central banks to do the same. If the yen is allowed to rise, other Asian countries may follow suit.

* Chinese deflation.

China's growth rate of more than 9 per cent ensures the nation will be a more prominent global force.

Rather than overheating, China may be gravitating toward an extended period of falling consumer prices. China is still producing and building too much. In fact, lower interest rates - which normally help to avoid deflation - may only intensify downward pressure on prices in China.

- BLOOMBERG