Nov. 16 (Bloomberg) -- Financial officials in Japan and China, Asia’s two largest economies, warned the Federal Reserve’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.

Emerging economies “might overheat and experience financial turmoil,” Bank of Japan Governor Masaaki Shirakawa said in Tokyo today. Low rates and the dollar’s depreciation present “new, real and insurmountable risks to the recovery of the global economy,” Liu Mingkang, China’s top banking regulator, said yesterday.

The comments reflect concern that the Fed’s pledge to keep rates near zero for an “extended period” may lead to a repeat of the financial crisis. MSCI’s emerging-markets stock index has risen 71 percent this year and Asian countries from Singapore to South Korea are trying to rein in surging real-estate prices.

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.

While lower interest rates will help Americans pare debt, “there are also risks involved in continued low rates,” Shirakawa said today at a Paris Europlace Financial Forum in Tokyo. Having borrowing costs near zero may strain government finances if it spurs speculation that the dollar will continue to slide, he said, while warning that easy policy by officials globally may have repercussions in the long term.

“Monetary easing in advanced economies has stimulated capital inflows to emerging economies,” Shirakawa said. If emerging nations continue to recover at a faster pace than advanced ones, they “might overheat and experience financial turmoil, triggering a recession,” he said.

Dollar’s Tumble

Low rates and the dollar’s tumble have “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies,” Liu told reporters in Beijing at the International Finance Forum.

The debate over the Fed and asset prices comes years after some analysts criticized the U.S. central bank for holding down borrowing costs for too long in 2003 and 2004. Dallas Fed President Richard Fisher is among those who have said the Fed’s actions unwittingly contributing to the housing bubble.

“I’m scared and leaders should look out,” Donald Tsang, the chief executive of Hong Kong, said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s rates in Japan contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Carry Trade

Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., said yesterday that low borrowing costs in the U.S. have spurred a carry trade with some currencies, notably the Australian dollar after recent rate increases by that nation’s central bank.

“The carry trades will further drive down the dollar’s value and fuel commodity prices,” Zhao said. “The dollar’s depreciation has also caused excessive liquidity in the global market.”

In a currency carry trade, the investor makes money by borrowing in a country with low rates, converting the money to a currency where borrowing costs are higher, and lending the money at that higher rate.

The dollar fell against most of its major counterparts at the end of last week as a report showed the euro nations emerged from their worst recession since World War II, encouraging investors to buy higher-yielding assets.

Keep Rates Low

The dollar, which has declined more than 5 percent against the yen and euro in the past three months, also weakened on speculation Federal Reserve officials will today reaffirm the bank’s pledge to keep rates low to support growth.

Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy.

U.S. Treasury Secretary Timothy Geithner reiterated his commitment to a “strong” currency on a trip to Asia last week. “It’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,” he told reporters in Tokyo Nov. 11. He also underscored the U.S. intention of reducing budget deficits.

‘Biggest Influence’

“The dollar’s devaluation has the biggest influence on China among emerging market economies,” China Construction Bank’s Zhao said. “China has huge amount of investments in dollar assets; their safety is threatened.”

China is the biggest foreign holder of U.S. government debt, with almost $800 billion of Treasuries, in part a consequence of its controls on its currency. Premier Wen Jiabao’s government has sold yuan and bought dollars to keep his nation’s currency fixed around 6.83 per dollar since July 2008. It gained 21 percent in the previous three years.

President Barack Obama may discuss China’s currency during his visit to China, which began yesterday. Geithner said last week the region has shown a commitment to adopting “market- oriented” exchange rates.

China triggered speculation on Nov. 11 that the yuan may rise when policy makers dropped a pledge from their monetary- policy report to keep the currency “basically” stable.

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Last Updated: November 16, 2009 02:08 EST