Nguyen Van Giau sighs audibly and shifts in his chair when I ask him the dreaded question: Is Vietnam losing its inflation battle?

It’s one the country’s central bank governor can barely go an hour without fielding these days. Such is life in a nation where consumer prices climbed almost 18 percent in April from a year earlier.

Giau’s assurances that he’s committed to taming inflation aren’t resonating with Vietnam’s 87 million people. The steady erosion of the currency has driven locals to hoard gold as the dollar grows shaky. Capital controls don’t stop households from swapping growing piles of dong for hard assets.

Vietnam’s $102 billion economy is just one example of an epic inflation fight that Asia might lose if central banks don’t act more aggressively. Rather than yanking away the proverbial punchbowl, they are keeping the monetary taps open for too long and imperiling Asia’s outlook. Asia needs less talking about these risks, and more doing.

The story last week was of Asia going on the defensive. Interest rates went up in India, Malaysia, the Philippines and Vietnam and policy makers pledged additional moves should events warrant them. Well, they do and timidity is setting Asia up for an inevitable bust after the impressive boom of recent years.

Part of the problem is that Asia has internalized the Federal Reserve’s core inflation philosophy. From Hanoi to Beijing, policy makers have been reluctant to tighten credit on the assumption that inflation is being unduly driven by a short-term rise in food and energy costs, while other prices are stable.

There are now indications that inflation isn’t just being imported, but increasingly generated domestically. Strong domestic demand is placing increased pressure on prices that won’t go away even if food and energy inflation moderates.

That puts the onus on central banks to assume the role of party pooper. Granted, it’s an incredibly difficult balancing act. Clamp down too much on credit, and officials might derail Asia’s rapid growth and rising living standards. Also, each rate increase risks courting even more hot money. It’s a supreme paradox of modern central banking: the more you act to pull liquidity out of the domestic banking system, the greater the influx of cash from overseas.

Poverty is another complication. If the Bank of Korea tightens the vise too much, it won’t toss millions into destitution. The same can’t be said of monetary policy in India, Indonesia or the Philippines. No central banker wants to be blamed for torpedoing their economy.

Central-bank independence has become somewhat of a misnomer in Asia since the death of Lehman Brothers Holdings Inc. in 2008. As markets plunged and growth shriveled, bankers slashed rates and worked closely with government officials. The key isn’t to repeat Japan’s mistake of never figuring out how to restore monetary normalcy.

Fears of strangling growth have officials in Jakarta, Manila and New Delhi taking smaller steps than inflation risks require. What is politically expedient today, though, may prove economically devastating tomorrow.

Take Indonesia, a clear emerging-market favorite these days. Bank Indonesia Governor Darmin Nasution said last week that the urgency to adjust rates is “not too high” even after core inflation accelerated to 4.62 percent in April from 4.45 percent. An appreciating currency won’t be enough to keep these increases from taking on a life of their own.

Inflation worries are already shaking up the political scene. In Korea, President Lee Myung-bak declared “war” on it. In China, Premier Wen Jiabao made cooling the fastest inflation since 2008 a top priority. In Singapore, it catalyzed voters to serve Prime Minister Lee Hsien Loong a wake-up call over the weekend.

Lee pledged that his People’s Action Party will change the way it governs after returning to power with the smallest electoral margin of victory for the party since Singapore’s independence in 1965. The discontent is partly about the dark side of globalization.

On one end of the wage spectrum, Singapore attracts vast pools of skilled bankers, scientists and executives whose wealth bids up prices. On the lower end, Singapore is a magnet for low-wage workers. So, middle-class wages are stagnant while prices rise. Leave it to inflation pressures to shake up politically stable Singapore.

And then there’s Vietnam, a cautionary tale among developing economies. It exudes potential, and its natural resources, demographics and low-cost labor are attracting the world’s attention. And yet Vietnam has too much of a good thing on its hands: too much money chasing too few stable investments.

The result is potential overheating that threatens to undermine an economy that recently gained middle-income status. There’s plenty of reason to think Vietnam will get things right, and that goes for the rest of Asia, too. The key is for central banks to get to work.

In the late 1990s, Asia learned the hard way that booms must be calibrated to avoid busts. The region is now at such a juncture and bold action is needed. If Asian inflation rates follow Vietnam into double digits, the only winners will be gold speculators.

By William Pesek

William Pesek is a Bloomberg News columnist. The opinions expressed are his own. ― Ed.

(Bloomberg)