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Asia stocks fall as growth fears swirl

HONG KONG - Asian stocks fell and government bonds rose on Thursday, as a sustained decline in oil prices could not shake a sense of gloom among investors about financial sector instability and the worsening global growth outlook.

The US dollar slipped against the yen after jumping to a seven-month high on Wednesday. It was also slightly weaker against the euro ahead of a European Central Bank policy decision due later, widely expected to keep interest rates on hold at 4.25 percent.

Crude oil was trading just below $119 a barrel having tumbled nearly 20 percent from July's record high, as expectations for US energy demand continue to deteriorate. Concerns about wavering demand in China, whose economy has devoured natural resources for the last decade and pushed up commodity prices, also weighed on copper prices.

Lower oil prices could be interpreted as relief for US consumers, on whom Asia depends for export demand. But inflation was still a global threat, bad loans continued to dog banks and insurers, and investors faced the prospect that all of the Group of Seven rich nations could slip into recession.

As a result, optimism was in short supply.

‘Certainly the environment is one that should be positive, with the weaker yen and lower oil prices,’ said Hideyuki Ishiguro, supervisor at the investment strategy department at Okasan Securities. ‘But the idea that Japan's economy isn't good is spreading.’

Japan's Nikkei share average fell about 1.5 percent, led by a 4.6 percent drop in shares of clothing company Fast Retailing Co Ltd

Large bank stocks like Mitsubishi UFJ Financial Group declined after American International Group Inc, the world's largest insurer, posted a third straight quarterly net loss after US markets closed on Wednesday.

Outside Japan, Asia-Pacific stocks edged down 0.5 percent, within sight of a 16-month low plumbed on Tuesday.

Hong Kong's Hang Seng index was largely unchanged, erasing early gains, with shares of China's top offshore oil producer CNOOC Ltd the biggest weight.

Cathay Pacific Airways was the top percentage decliner on the index, down 4.8 percent, after the airline on Wednesday posted its first interim loss in five years.

CENTRAL BANK DILEMMA: HIGHER GROWTH OR LOWER INFLATION?

South Korea's benchmark KOSPI dropped 1.5 percent, weighed down by the financial sector after the Bank of Korea on Thursday raised its main interest rate by 25 basis points (bps) to its highest in 7-’years to battle price pressures.

‘Clearly inflation is up, but there are massive growth risks for the Korean economy. The entire household sector and small and medium-sized enterprise sector are hugely leveraged. There is likely to be a downturn in economic growth,’ said Frederic Neumann, Asia Pacific economist with HSBC in Hong Kong.

Other central banks around the world face the same dilemma -- whether to tighten borrowing conditions now to stem inflation and risk a sharper economic slowdown.

Earlier this week, Indonesia's central bank raised rates by 25 bps for the fourth time this year, but the Reserve Bank of Australia kept its rates on hold.

The US Federal Reserve held rates steady at 2 percent on Tuesday, expressing concerns about both a slowing economy and rising inflation. The Fed indicated it is in no rush to push borrowing costs higher.

That has helped to spur investors' willingness to take risks, a primary driver in boosting the US dollar to its highest level against the yen in seven months on Wednesday.

The dollar was down 0.1 percent against the yen at 109.46 yen The euro edged up 0.1 percent to around $1.5425 ahead of the ECB's meeting later in the day.

The potential for a global recession was lurking in the minds of many investors.

‘All the G7 economies are now in a recession or headed in the short run towards a recessionary hard landing,’ said Nouriel Roubini, chairman of RGE Monitor, a New York economics research firm, in a blog posting on Wednesday.

‘While the world will technically avoid a global recession (defined by the IMF as global growth below 2.5 percent) it will get quite close to it by mid-2009 as global growth will slow down to a near recessionary 3 percent.’

Japanese government bond futures hit a four-month high on concerns about the outlook for Japan's economy and due to a fall in Tokyo share prices.

September 10-year JGB futures rose as high as 137.46 for a gain of 0.27 point on the day, the highest level for a lead futures contract since late April.

Gold was up a touch at just below $882 an ounce, but still more than $100 cheaper than in the middle of last month.