Domestic demand in the short run will suffer and therefore, U.S. exports to the region will as well. The depreciation hurts in a number of ways. Because lending in developing countries is risky, international investors often hedge risks by making loans denominated in dollars and by making short maturity loans. The devaluation of the local currency makes debt servicing of dollar denominated loans more expensive for domestic companies. In addition, because most debt is of short maturity, developing economies are particularly sensitive to interest rate increases.
Japan has by far the highest exposure to the region of the developed countries.
Japan s economy will be hurt not only by week demand for Japanese exports, but also by a loss of competitiveness from the currency devaluations. In the long run, Asian economies may well be better off from the latest currency fiasco. Economies in the region are largely export based and will therefore benefit substantially from the devaluation. The crisis might also lead to financial free-market reforms that would attract more foreign direct investment and would ultimately lead to greater productivity. In the early 1980 s falling commodities prices led to balance of payments crises in Thailand, Malaysia, and Indonesia.