ROMAWAS FINANCE: U.S. Props Up Drooping Yen/CORRECTED REPEAT

By IPS Correspondents Reprint | | Print |

WASHINGTON, Jun 17 1998 (IPS) - The United States, fearful that Japan’s weakening currency could spark a new round of financial turmoil, sold dollars to buy yen Wednesday for the first time since 1992.

The yen rose to 139 against the dollar, from 142, soon after the Federal Reserve Bank of New York intervened in financial markets. Officials hoped benefits of that action would be felt Thursday in Asia, where currencies generally held steady as the yen climbed to 142.45 from Tuesday’s 144.92.

The Singapore and Taiwan dollars, Philippine peso, Thai baht and Korean won gained slightly Tuesday but the Malaysian ringgit fell from 4.04 to 4.05. Indonesia’s rupiah started the day at 15,000, fell to near its historic low of 17,000, and ended at 16,525.

China’s yuan, also on financial analysts’ watch list as a potential catalyst of competitive devaluations, closed slightly down. U.S. President Bill Clinton and Treasury Secretary Robert Rubin were scheduled to travel next week to Beijing, where they were expected to press Chinese officials to keep earlier promises not to devalue the yuan.

Clinton told reporters Wednesday it was in America’s interest to see that all Asian economies remained stable.

The yen in recent weeks had fallen to its lowest level in eight years, fuelling concern that the deepening recession in Japan spelled trouble not only for Asian neighbours struggling to cope with economic woes of the past year but also to other regions. Japan’s economy is the second largest in the world.

Asian nations struggling to export their way out of economic trouble – especially Thailand, Indonesia and Korea, which agreed international bail-outs with the International Monetary Fund (IMF) – have been hobbled by Japan’s sagging economy and currency.

The impact has been three-fold. First, Asian producers have been unable to increase exports to Japan. Second, the yen’s decline has added pressure on Asian governments to devalue their currencies in hopes of maintaining competitive advantage by keeping down prices of their exports. Third, however, this also has served to drive up the price of imports – including basic necessities and materials used in making export products.

Unemployment and poverty rates rocketed throughout the region and in Indonesia alone some 20 million children were at risk of being forced to drop out of school, the World Bank and Asian Development Bank warned Tuesday.

The U.S. intervention, at the behest of the Tresasury department, was designed to break that spiral. Boosting the yen’s value against the U.S. dollar also could serve to slow growth in the U.S. trade deficit and therefore protect producers here, according to economic analysts.

Asian stocks rallied on early signs the yen was recovering. Korea led the rally, its composite index rising 8.5 percent, and was followed by Hong Kong (up 6.35 percent), Bangkok and Singapore (5 percent each), Jakarta (4.11 percent), and Kuala Lumpur (3.19 percent). European stocks also opened higher Wednesday, although Tokyo was little changed.

The New York Fed’s action came hours before Deputy Treasury Secretary Lawrence Summers was scheduled to leave for Tokyo to hold emergency talks with Japanese officials on reviving Japan’s economy and shoring up the yen.

Summers would be meeting Finance Minister Hikaru Matsunaga and Vice Finance Minister Eisuke Sakakibara and was expected to urge “drastic” action, according to reports here.

“We have for a long time expressed great concern about the weakness of the yen and the weakness of the Japanese economy,” noted Treasury Secretary Rubin. “They have had virtually no growth for six of the last seven years…the fundamental answer to fundamental problems is economic policy.”

Senior Asian politicians have voiced similar complaints. Earlier this week, Malaysian Deputy Prime Minister Anwar Ibrahim accused Tokyo of dragging its heels – but added that Washington also needed to do more to help the region’s ailing economies.

Tokyo announced Wednesday it would speed up elements of a 117- billion-dollar “stimulus programme” of tax cuts, government spending, and low-interest business loans. Those measures would boost gross domestic product (GDP) by two percent and ensure economic recovery by autumn, the government of Prime Minister Ryutaro Hashimoto said when it first announced the proposals in April. However, analysts here believed the benefits would be short- lived.