Weak Japan exports pile on gloom, shares plunge

TOKYO/BEIJING, Nov 20 (Reuters) - Japan's exports to Asia fell in October for the first time since 2002, showing that the fallout from the credit crisis has spread to neighbours such as China and adding momentum to investors' flight to the safety of cash. Capital flight from emerging markets drove the currencies of South Korea and Indonesia to their lowest levels since the Asian financial crisis a decade ago. India's rupee hit a record low. Asian markets suffered the same battering that drove U.S. and European stocks to their lowest levels in 5-½ years overnight. Japan's Nikkei tumbled 6 percent, while the MSCI All-Country World Index hit its lowest level since May 2003, dragged down by Asian shares. Shipments to Asia had previously cushioned the impact on Japanese exports of weakening demand from the United States and Europe. But data on Thursday showed they fell 4 percent in October from a year earlier. The drop in Japanese exports contributed to mounting signs elsewhere that the global slowdown could get worse. The Federal Reserve forecast that the U.S. economy would contract through the first half of next year and signalled it was ready to cut interest rates further, while U.S. consumer prices last month posted their biggest drop on record. "The fall in exports to Asia reflects that their economies are also taking a blow from weakness in developed economies," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. Hopes that Asian economies, particularly China, could help prop up global growth have begun to fade as weaker demand in the United States and Europe has quickly translated into slowing factory output and job cuts. Underlining the extent of Beijing's concerns over its own slowdown, Minister of Human Resources and Social Security Yin Weimin said on Thursday that stabilising employment is now the government's top priority. The worrisome outlook sent bonds surging. The yield on Japanese 10-year government bond futures fell to as low as 1.430 percent on Thursday, the lowest since early October, while the U.S. Treasury two-year yield hit a record low at one point. CHIP MAKERS HIT Corporate news helped fuel the rush to safe havens. Citigroup Inc shares tumbled 23 percent on Wednesday to a 13-year low, as investors questioned the survival prospects of the U.S. banking giant on concerns about mounting losses from credit cards, mortgages and toxic debt. Chances for a $25 billion bailout of the U.S. auto industry faded further, with little expectation that Democratic leaders in Congress will support a compromise that hinges on negotiations supported by Republicans and the "lame-duck" White House. "I won't say it's completely over. I'm still having conversations with people. But it doesn't look good," Sen. Robert Bennett, a Utah Republican. He was referring to the chances of lawmakers striking a deal on aid for General Motors Corp, Ford Motor Co and Chrysler LLC that could pass. Shares in key Asian memory chip makers fell on Thursday, with Hynix dropping nearly 15 percent, on growing signs that the market slump could be prolonged. ASIAN CURRENCIES UNDER PRESSURE Some countries are looking almost as vulnerable as troubled companies. The International Monetary Fund on Wednesday approved a $2.1 billion loan for Iceland to try to stabilise what the fund called a "banking crisis of extraordinary proportions". The fund said Iceland's economy was likely to shrink 9.6 percent next year and unemployment would quadruple to 5.7 percent. An intense aversion to risk weighed heavily on some Asian currencies on Thursday. Fears South Korea's export-dependent economy would be hit hard by the crisis drove the won down more than 4 percent to its lowest level in almost 11 years. The central bank was suspected of intervening to prop up the currency. The Indian rupee dropped to a record low in opening trades as investors took fright at another sharp fall in global stock markets. The Indonesian rupiah also fell to its weakest levels in a decade, with trading volumes virtually drying up as market participants braced for a steep fall in the currency. "Not a single interbank deal went through yesterday for four to six hours," said a trader in Hong Kong. Looking to avoid recession, Vietnam cut interest rates on Thursday for the third time in four weeks. European Central Bank Executive Board member Lorenzo Bini Smaghi said that the ECB could cut its rates further after two such moves in the past few weeks. "We have said it is a possibility. There may be more rate cuts, depending on the developments," Bini Smaghi said in an interview with the Portuguese newspaper Publico, adding that he did not anticipate the onset of deflation.