U.S. Endeavor to Boost Yen May Become a Losing Effort

The Clinton administration’s surprise intervention to help stem the slide of the Japanese yen is in danger of becoming just what many analysts had feared--a high-risk gamble that falls flat on its face.

That would leave the White House with precious few options for helping to shore up the Japanese economy except to keep treading water, pouring billions more dollars into the foreign exchange markets to buy yen.

Despite a weekend of high-pressure meetings between Japanese and U.S. officials--and a threat of further intervention later--the yen resumed its fall Monday, returning partway to where it stood before the U.S. action of only five days earlier.

Many analysts said that despite the administration’s move last week, the Japanese currency could fall substantially lower against the dollar by midsummer unless Japan finally gets serious about overhauling its recessionary economy.

“The market has been disappointed so many times with a lot of yen-rescue packages,” said Alan K. Stoga, managing director of Zemi Investments, a New York international investments firm. “So far, this one is proving to be no different.”

Monday’s renewed slide came after a weekend of meetings in Tokyo between Japanese Finance Ministry officials and Deputy Treasury Secretary Lawrence H. Summers did not result in a major turnaround by the Japanese.

Some market analysts had speculated last week that Washington entered the markets to buy a few days’ time so that Japan, under heightened worldwide pressure, could hammer out a package of policies to stimulate its economy and repair its ailing banking system. But the Japanese made no new promises.

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The yen fell to 138.10 to the dollar in New York on Monday, down from 137.02 on Friday, raising new questions about the entire U.S. strategy. Immediately after Wednesday’s intervention, the yen surged from 146.14 to 136.75 before resuming its retreat.

The administration did not act last week solely out of a desire to help Japan. Treasury Secretary Robert E. Rubin worried that the continued decline of the yen would drag other Asian economies down further--and, ultimately, hurt the United States.

Strategists say Rubin timed his move mainly with an eye to what was happening in the markets. The pressure on the yen was intensifying rapidly. The markets were unprepared for the possibility that the United States might intervene. Tactically, the moment seemed right.

There were also some political concerns. White House officials worried that allowing the yen to plunge further might have given China a green light to devalue its yuan as President Clinton was preparing for this week’s visit there.

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Nevertheless, analysts say that by moving to intervene before Japan agreed to make serious policy reforms, Rubin lost some of the leverage on Tokyo that he might have had if he had held out.

At the same time, by not lining up the support of America’s European allies in advance, he gave up some of the extra political force that the threat of intervention might have held if it had come from the international community rather than from the United States alone.

As a result, Rubin is now on the defensive and more dependent than ever on bold new steps by Japan both to speed its promised tax cut and public works programs and shut its financially troubled banks.

Moreover, as the markets showed Monday, despite Rubin’s threats that the United States will continue to enter the markets “as appropriate,” there is little that the government can do to stabilize the yen by intervening, beyond an occasional kick or two.

David C. Mulford, a former Treasury undersecretary now at Credit Suisse First Boston in London, points out that the currency markets have grown so large that neither the United States nor its allies can afford to try to buck them for long.

“Intervening the way they did is a limited tool,” Mulford said. “It may buy you a window of opportunity, but it also has a shelf life. In this case, they may have smoothed out the volatility of the yen, but if the Japanese don’t respond, over time things will go back.”

The administration itself was well aware of such risks before Rubin made his decision to intervene. Officials say the secretary’s own aides were divided.

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Allen Sinai, chief analyst for Primark Decision Economics Inc., who supported the intervention, said Japan was “doing bits and pieces of the right thing,” but he conceded that “markets don’t wait.”

And C. Fred Bergsten, director of the Institute for International Economics, predicted that the threat of additional U.S. intervention might help prevent a serious slide in the value of the yen. “I think they can hold the fort for a while,” Bergsten asserted.

Zemi’s Stoga said the real issue--whether the Japanese would have acted more quickly if Rubin had decided to hew to his previous policy and let the yen fall further instead of intervening in the markets to help stem its slide--will never be answered.

“You can either argue that Rubin was right the first time or that he was right the second time, but the big question is, have the Japanese changed policy?” Stoga said. “If they have, then he was right to intervene.”