U.S. Acts Decisively to Stabilize the Yen

The United States, orchestrating a major international effort to avert a worsening of Asia’s financial crisis, intervened in the foreign exchange markets Wednesday to help stabilize the Japanese yen and announced a series of other moves to deal with the Asian slump.

At the request of President Clinton, Deputy Treasury Secretary Lawrence H. Summers left for Tokyo to confer with senior Japanese officials today about how to speed the economic reforms that the Japanese government has pledged to undertake.

U.S. officials also called a meeting of deputy finance ministers of the seven major industrial countries and 11 Pacific Rim nations in Tokyo this Saturday to discuss additional ways to prevent the recession in Japan from exacerbating the economic crisis elsewhere in Asia.

The flurry of developments came after Clinton telephoned Japanese Prime Minister Ryutaro Hashimoto late Tuesday to urge him to take additional steps to spur the Japanese economy and after Hashimoto outlined a series of emergency measures in response.

Among the steps that Hashimoto promised were speeding up the tax cuts and public works spending that Japan had pledged earlier, closing insolvent banks more quickly and tightening government regulation of the banking system sooner than expected.

Wednesday’s developments sent the world’s financial markets rallying. In New York, the yen soared by more than seven to close at 136.37 to the dollar after the intervention effort was announced. The Dow Jones industrial average rose 164.17 points to close at 8,829.46. Other stock markets rebounded worldwide.

Clinton and Hashimoto pronounced themselves “delighted” with the results. “I wanted to send a clear signal to the markets that the United States supports Japanese reforms [and] believes the Japanese people can pull out of this economic slump,” Clinton told reporters.

The U.S. intervention in the foreign exchange markets--selling dollars for yen in an effort to push up the value of the Japanese currency--was its first since August 1995. But the urgency is far greater today because of the economic crisis gripping Asia.

U.S. officials had insisted it would do no good to intervene until Japan carried out its promised reforms. They said they agreed to intervene only after Japan provided a list of specific measures and set some target dates for putting them into effect.

Treasury Secretary Robert E. Rubin said in a statement that the United States had acted “in the context of Japan’s plans to strengthen its economy.” He said Washington was “prepared to continue to cooperate” in such intervention efforts “as appropriate.”

Nevertheless, private analysts, who were more skeptical, said they will watch how quickly and aggressively Japan moves on its promised reforms.

“The real key is the follow-through by the Japanese government,” said Gregory B. Fager, an Asia expert at the Institute of International Finance. “If they don’t change the fundamentals, then the rise today will be very fleeting. We could see the yen fall again.”

Indeed, the U.S. has been pressuring Japan for decades to deregulate its economy, with little success, and there is skepticism that this push will be any different. Many Japanese resent American interference and do not believe their economy is in serious trouble.

Moreover, White House motives are the object of skepticism in Japan. There is the belief that the United States wants Japan to follow economic policies that will primarily benefit Uncle Sam.

Wednesday’s actions came after several days of intense pressure on Japanese officials by top U.S. policymakers--and considerable wrangling within the Clinton administration itself--in the face of what appeared to be a mounting threat to global financial markets.

On Monday, largely because of worry about the Japanese recession and the sliding yen, the Dow Jones industrial average plunged 207 points, paralleled by similar declines in other major financial markets. Rumors Tuesday of Summers’ mission helped stabilize the markets.

The United States has been pressing Japan to take bold steps to help revive its economy, but the Hashimoto government had brushed the appeals aside. Political analysts say Hashimoto had been reluctant to act before Japan’s upper house elections on July 12.

U.S. officials hope that the actions taken on Wednesday--and over the next several days during the meetings in Tokyo--will help stem the yen’s decline at least until after the July 12 elections in Japan, when the government presumably can act more forcefully.

Top administration policymakers had feared that if the recession in Japan deepened and the yen continued to slide, that would leave other financially strapped Asian countries with fewer opportunities to sell their exports, jeopardizing prospects for their recovery.

A sliding yen would also make it more difficult for China to carry out its promise to avoid devaluing its yuan. Economists fear that if the yuan was devalued, that would seriously exacerbate the Asian crisis by forcing other Asian countries to follow suit.

China had been warning publicly for days that it was nearing the point where it could not hold the line on the yuan. Seeking to meet U.S. requests to keep its currency stable was beginning to hurt export sales by leaving China’s products priced higher than those of neighboring countries whose currencies had lost value.

The administration’s major objective Wednesday was to signal that it was determined to help Japan stem the slide in the yen. Until the United States intervened, many traders had become convinced--erroneously--that Washington wanted to push the yen’s value down. For that reason, the Federal Reserve Bank of New York and the Bank of Japan took the rare step of publicly announcing that they had intervened in the foreign exchange markets.

Although Rubin would not confirm it, some traders estimated that the United States spent about $2 billion selling dollars in exchange for yen Wednesday, a cost that would be difficult to sustain if the yen started falling again. But the figure could be way off.

As is usual in such cases, the actual selling of dollars was carried out by the New York Federal Reserve Bank, after a decision to intervene that was made jointly by Rubin and Federal Reserve Board Chairman Alan Greenspan. Clinton was informed in advance.

Summers’ visit to Tokyo comes a week before Clinton is scheduled to arrive in China for a summit meeting with Chinese President Jiang Zemin, and the United States has spent a good deal of political capital trying to persuade China to hold the yuan in check.

Officials said that if the yen could be stabilized before Clinton’s visit to China, that would make it easier for China to stand by its promise--and enable Clinton to praise the Chinese for helping to avert serious damage to the world economy.

* IN JAPAN, DENIAL: Many Japanese don’t believe their country is in serious trouble. D1

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Why the Yen’s Value Matters

If the yen resumes its slide:

* Japanese products will become cheaper for Americans and other foreigners. That will make other Asian countries less competitive, deepening their economic troubles.

* American workers will lose jobs and U.S. corporate profits will suffer, because it will be harder for Americans to sell in Japan and throughout Asia.

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If the yen can stabilize or continue rising:

* Goods from other Asian countries will become more attractive, boosting their economies and reducing pressure to devalue their currencies.

* American goods will become more competitive in Asia, thus boosting profits and jobs of American companies.

Researched by JENNIFER OLDHAM / Los Angeles Times