Washington’s Change of Heart Heartens Asia

The U.S. intervention to bolster the Japanese yen bought “breathing space” for Asia’s troubled economies, experts said Wednesday.

But the big change was in the U.S. capital, not in Asia.

Washington’s action signaled a more forceful U.S. role in helping the Japanese economy rebound and in helping the rest of Asia recover from its financial crisis. The U.S. moves also, in effect, placed a floor under the yen and other major currencies in Asia.

Those were the biggest factors inspiring confidence in Asia and around the world.

The intervention quickly brought Japan’s government to a new level of commitment and urgency about reforming its recession-bound economy. And it ensures that “China and Hong Kong will not devalue their currencies in the near term,” said Gary Hufbauer at the Washington-based Council on Foreign Relations.

But the applause will be short-lived unless the Japanese government takes actions to convince the markets that it is serious about turning its economy around.

Prime Minister Ryutaro Hashimoto’s promise to President Clinton that he will close insolvent banks--if it is carried out--will free up government funds to aid strong banks and improve Japan’s whole financial system, said Tomoko Iwakawa, vice president and currency expert at Los Angeles’ Union Bank of California, a subsidiary of Bank of Tokyo-Mitsubishi, Japan’s largest bank.

Until now, Japan’s government has spent heavily to support all the country’s major banks in fear that the collapse of any bank would weaken public confidence. But the strategy backfired. The confidence of Japan’s people, in their banking system and their government, is already at a low ebb.

Consumer spending and business investment have fallen in the last year, sending Japan’s huge economy into recession and contributing to the decline in the rest of Asia, which depends on Japan as a source of investment and as an export market.

So even though closing banks and taking other drastic measures will increase unemployment, they could have the paradoxical effect of bolstering confidence among Japan’s consumers. The Japanese will get a cut in income taxes, Hashimoto told Clinton, repeating a pledge he made in April.

“Today’s intervention makes an important, positive change in Asia’s outlook,” said economist David Malpass of the investment firm Bear Stearns. “Currency weakness has been a big cause of Asia’s problems, so stopping the weakness will help.”

The falling yen made Japan’s goods cheaper in international markets, allowing them to compete directly with exports from South Korea and Taiwan. The falling yen also reduced Japanese investment in production facilities in China and the countries of Southeast Asia.

This has hastened deterioration across Asia. The South Korean won is 75% below its value of a year ago against the U.S. dollar, the Taiwan dollar has been falling, and Indonesia is sinking deeper into economic disarray, with a currency now less than one-eighth its value of a year ago.

China, fearing for its own economy and impatient with the lack of Japanese and U.S. action, has been issuing implied threats that it could devalue its currency, the yuan, and start a new and ruinous spiral of currency weakness.

The degree of regional discontent has become more evident in recent days as Asian government officials have gone public with their criticisms of Japan--the giant of Asia with a $4-trillion economy.

“Japan has been the greatest beneficiary of the global trading system. But instead of being its salvation, it has become part of the problem,” said George Yeo Yong Boon, Singapore’s information minister.

The currency weakness had a direct effect on the U.S.

Asian nations could not buy U.S. exports but wanted desperately to sell their goods to the U.S. to earn needed dollars. The U.S. trade deficit ballooned to $13.3 billion last month largely as a result.

Despite that, the U.S. government had kept its distance from events in Asia, acting through the International Monetary Fund and stating openly that it would not intervene in currency markets.

But the situation was becoming critical, so the U.S. changed policy. Efforts will now be made, starting with a conference of deputy finance ministers in Tokyo this Saturday, to keep the yen’s value higher and to help the rest of Asia.

This will not come without a penalty. A higher yen will mean a lower dollar, which could mean somewhat higher interest rates in the U.S. But the advantages outweigh the costs for the United States, experts agree.

So pressure will be kept on Japan to open its markets and reform its economy, beginning with the meetings in Tokyo starting today with Deputy Treasury Secretary Lawrence H. Summers, who was dispatched by the White House.

The outlook is for the U.S. to play a more activist role in helping other economies of Asia to restructure. Clinton promised as much to Korean President Kim Dae Jung in Washington last week.

Asia’s cornerstone economy is Japan. Change and reform there are necessary if the rest of Asia is to progress. That’s why there was such overwhelming approval for U.S. moves Wednesday to take a more direct hand in helping reform Japan’s economy.

Hope is rising in Asia. But until Japan follows through, as Hashimoto promised Clinton it would, it’s still too soon to declare a turning point in the Asian crisis.