tion remains a major challenge and tighter monetary policies are needed across East Asia, the World Bank said Monday, as it downplayed risks to regional growth from the devastating earthquake in Japan. In a semi-annual East Asia and Pacific Economic Update, the World Bank nudged up its 2011 growth forecasts, but said the big picture was that the fight against inflation would weigh on economies from China to Malaysia. "Last year was a very good year. East Asia led the world as far as recovery was concerned. Now the big question is can East Asia sustain that recovery?" said Vikram Nehru, World Bank's chief economist for the East Asia and Pacific region. "In the short term, there are already two big issues. First is the tragedy in Japan," he said. "The second issue is that of inflation. I believe inflation is rising." While Japan would suffer short-term economic damage from the disaster earlier this month, the bank said its impact on the broader region should be limited to a quarter or two. "As reconstruction efforts get under way, there should be a pick-up in economic activity that would boost growth," said Ivailo Izvorski, lead economist for the World Bank in East Asia. The World Bank predicted that the developing nations of East Asia will grow 8.2 percent in 2011, faster than the 7.8 percent forecast it made six months earlier, but a clear deceleration from the region's estimated 9.6 percent growth in 2010. It warned that central banks in the region risk falling behind the curve in combating price pressures if they do not raise interest rates and let their currencies rise. In the region's biggest economy China, where authorities have used reserve requirements and other direct price controls to curb inflation, the Washington-based lender saw room for higher rates and a stronger yuan. "I would argue that there is further room for interest rate increases in China, there is further room for policy contraction," Nehru said. "I also know the authorities are doing a lot in cooling asset prices by making targetted action towards asset markets in particular areas, and that is also to be welcomed." Excluding China, developing East Asia will probably expand 5.3 percent this year, down from a 6.7 percent expansion last year, the report said. China, the world's second-largest economy, is likely to grow 9.0 percent this year, slower than last year's 10.3 percent pace, it added. Not everyone agreed with the World Bank's relatively sanguine outlook on Japan's ability to recover. Speaking at a forum in Singapore, the country's Finance Minister Tharman Shanmugaratnam said Japan's nuclear crisis could hurt consumer and business confidence. "Confidence is affected in a different way from a one-off natural disaster," said Tharman, tipped to be the next head of the International Monetary Fund's International Monetary and Financial Committee. Separately, Citigroup said that disruption to global manufacturing from Japan's earthquake "is more serious than earlier thought." "We could see production of goods reliant on Japanese inputs without sufficient inventories temporarily stall, such as electronics, autos and shipbuilding," Citi economists Johanna Chua and Brian Tan said in a note to clients. The US bank said risks to growth appear greatest in Thailand, where manufacturers rely on electronics, car and chemical components from Japan. South Korea and Taiwan also turn to Japan for plastic and electronic components, but both also compete with Japan in many areas and may benefit from higher prices and market share gains. However, other economists predicted that Japan's devastating earthquake will further slow growth in Asia, where rising oil prices and higher interest rates are already cooling an engine of the global economy. No one is predicting a massive slowdown, but as the grim human toll of Japan's March 11 quake mounted Monday and fears of spreading radiation and prolonged power outages grew, forecasts about the economic effect of the quake also darkened. Few economists are ready to specify just how big Asia's slump will be because of the uncertainties over Japan's Fukushima Dai-ichi nuclear plant and when power shortages – which are hitting industrial production – will be resolved. "You are clearly not talking about reducing growth estimates by 50 percent for the region," said UBS economist Duncan Wooldridge. "It's likely to be measured in increments of maybe 25 basis points."
