The Coming Week in Asia: China-Taiwan Spat Threatens Recovering Markets

The yen remains strong in the face of the turbulence, causing a headache for exporters.
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TOKYO -- Like spoiled kids, China and Taiwan are wrecking the family picnic.

For weeks now, the two have been taunting each other. Taiwanese president Lee Teng-hui started the spat when he called for a "state-to-state" dialog. Lee knew he was pushing a hot button for China, which considers Taiwan part of its territory although Beijing exercises no political influence of the island.

China quickly responded in typical older-brother fashion, placing troops on alert in the southeastern province of Fujian. The message to Taiwan was clear: We're bigger and stronger, so knock it off.

Like all family fights, this one has the potential to get nasty. And just at the wrong time. Asia and Japan are showing signs of recovering from nasty downturns and don't need the squabble wreaking havoc with their stock markets. The potential for higher U.S. interest rates, the recent strength in the yen and Pyongyang's insistence that it wants to lob a missile over Japan are doing that for them.

"I have a hard time concentrating when I see headlines coming across the wires about China, Taiwan and North Korea every day," says one frustrated trader at the Tokyo branch of a big German bank. "You never know when words are going to morph into action."

The turbulence hasn't hurt the yen, which often falls against the dollar when times get intense. On Friday, after the Japanese government revised its first-quarter GDP growth to 2% from the previous 1.9%, the yen rose by nearly a full unit to 114.60.

The stronger yen causes much headache for exporters like

Sony

(SNE) - Get Report

and

Toyota

(TOYOY)

. The weaker yen makes all those Walkmans cheaper for American consumers and improves the yen value of repatriated earnings on the Camry you just bought.

All that economic activity, U.S. and European firms suspect, means fatter profits from a country that has been an economic black hole for most of the '90s. Who wouldn't want to crack a market that sits on $10 trillion in personal savings?

That's what wags in Tokyo say U.S. brokerage

Morgan Stanley Dean Witter Discover

(MWD)

is thinking of doing. Like

Merrill Lynch

(MER)

before it, the big investment bank is said to be interested in setting up a retail brokerage in Japan, according to the

Mainichi

newspaper, one of the country's largest broadsheets. According to the paper, Morgan is looking to establish a joint venture with

Sanwa Bank

(SANWY)

.

While both firms have denied such plans, industry watchers note that Morgan Stanley has flirted with the idea of retail brokerages in Japan and Europe since late last year.

No word what it thinks about expanding in China and Taiwan.