July 10 (Bloomberg) -- Asia is wondering if it has a new crisis on its hands -- the flipside of 1997's. This time, it's not plunging currencies that are causing trouble, but rising ones.

Ironic, isn't it. Policy makers are scrambling to halt increases in their currencies. And investors have been conditioned by governments to believe rising currencies are bad, while sliding ones are good because they boost exports and create jobs.

It's time Asia scrapped such thinking. The region has honed its devalue-your-way-to-prosperity strategy since the 1997 crisis, one that's championed by the region's biggest economy, Japan. But Asia is doing so to the detriment of its growth outlook for three reasons.

First, it distracts economies from fixing their real problems. Second, it limits the amount of foreign capital they attract. And third, it delays the correction of one of the world's most dangerous economic imbalances: the gaping U.S. current account deficit.

``If a weak currency really were good in the long run, Latin America's economies would be booming,'' says Marc Faber, managing director of Marc Faber Limited and an investor in Asia for more than 20 years. ``Asia should move beyond all this.''

The appeal of exchange rates is understandable. It's the most painless way to stabilize an economy. Asian tourists visiting New York may not like that their money buys less, but governments here see it as a necessary evil to stay competitive. By using a currency's value as the primary shock absorber, countries aren't fixing the cracks in their economies; they are hiding them.

Beggar-Thy-Neighbor

Take Singapore. Its central bank today signaled it will accept a weaker currency to bolster growth in an economy that shrank 4.3 percent in the second quarter. It reset its target trading band for the Singapore dollar to around current levels, a move that represents an implicit easing of monetary policy. That's fine for now, but Singapore really needs to reinvent its economy.

Or Japan. Amid unemployment near a record high, corporate bankruptcies and deflation, Tokyo is relying on a weak yen as never before. Trouble is, a soft yen means banks can take more time disposing of bad loans and deadbeat companies can continue to operate.

Japan's beggar-thy-neighbor policies have competition. Policy makers throughout much of Asia are working to combat a weaker U.S. dollar with their own softer currencies. The efforts may pay off in the short run and hurt in the longer term.

Long-Range Challenges

Economies have been too distracted to tackle long-range challenges. Now that Asia's currencies are rising versus the U.S. dollar, governments may regret not doing more to shore up banking systems, reduce bad loans and increase competition.

The Indonesian rupiah, for example, is up more than 9 percent against the U.S. dollar this year. The Indian rupee and Thai baht, meanwhile, are up 3.84 percent and 3.48 percent, respectively. The currencies of Pakistan, the Philippines, South Korea and Taiwan also are up this year.

Rather than fighting the trend, policy makers should let it play out. In the age of globalization, capital flows brought in by a firm currency can be more important than the increased trade afforded by a softer one.

Countries require capital to support stock markets that are playing unprecedented roles in economies. Foreign capital is needed to hold down interest rates, too. That boosts growth and helps companies raise money in the bond market instead of borrowing from banks.

Inflation Risks

A firm currency also keeps inflation under wraps, allowing central banks to keep interest rates low. While deflation is getting all the attention these days, countries such as Indonesia, South Korea and the Philippines are, to varying degrees, grappling with inflation risks.

Of course, there are some examples of economies being held back by overvalued currencies. Hong Kong continues to sink under the weight of its 7.8 Hong Kong dollar peg to the U.S. dollar. While policy makers like the stability it affords the economy, Hong Kong's growth is suffering, as are its markets.

China's currency is a far more pressing issue for Asia; it's almost universally thought to be weaker than it should be. More and more manufacturers around the globe are complaining that China's currency is giving it an unfair advantage. It's spawned chatter about a Plaza Accord-like deal to boost the yuan's value.

Global Adjustment

There are few convincing arguments for weaker exchange rates in Asia. In fact, Asia's penchant for devaluing currencies may be delaying a necessary adjustment in global markets. Unless the U.S. dollar weakens, that nation's current account deficit -- already more than 5 percent of the economy -- may continue widening. That means it will become a bigger imbalance.

Of course, the U.S. may also be going the beggar-thy-neighbor route. The U.S. Treasury has left little doubt it's okay with the dollar's 7.48 percent drop versus the euro this year. If U.S. growth doesn't pick up soon, the Bush administration may opt for a more activist approach, talking down the dollar.

Here, Asia is faced with an end-justifies-the-means situation. While Asians bristle at the idea of the world's largest economy devaluing its way toward prosperity, Asia's fortunes are still closely tied to the U.S. If U.S. growth booms and its consumers buy more Asian goods, wouldn't it be worth the short- term pain of a stronger local currency?

Unfortunately, Asia is still obsessed with exchange rates. It's a preoccupation that makes little sense in the short run and even less in the long run.

Last Updated: July 9, 2003 23:03 EDT