The US and Japan yesterday jointly stepped in to reverse the yen's rapid decline in an attempt to prevent Tokyo's economic troubles from worsening Asia's financial crisis.
It was the first currency market intervention by the US since 1995 and followed an announcement from Mr Ryutaro Hashimoto, Japan's prime minister, that the government would speed up a restructuring of its heavily indebted banking system and accelerate efforts to boost the domestic economy, which is now in recession.
The yen, which on Monday dropped to an eight-year low against the dollar, responded to close in European trading at Y138.2 against the dollar, compared with Y144.2 the day before. Dealers estimated that the Federal Reserve spent more than $2bn supporting the yen.
Mr Robert Rubin, US Treasury secretary, said: "The US monetary authorities operated in the exchange market this morning in co-operation with the monetary authorities of Japan. We are prepared to continue to co-operate in exchange markets, as appropriate."
Until last week, US officials were insisting foreign exchange market intervention would be useless without some more fundamental action by the Japanese authorities. President Clinton described Japan's planned reforms as "aggressive" and "bold". "I wanted to send a clear signal to the markets that the US supports Japanese reform, and believes the Japanese people can pull out of this economic slump and restore growth and opportunity. It's very important to all of Asia," he said.
Mr Hashimoto said Japan would "expeditiously restructure the financial system, including the prompt disposal of bad assets". It would also accelerate implementation of a fiscal stimulus package and "reform both corporate and individual tax structures".
Stock markets around the world rallied on the prospect of action. Mr Jean Michel Severino, World Bank vice-president for Asia and Africa, was reported as saying in Australia that Japan was "on the threshold of a deep and long recession" that could generate a global slump.
Washington also dispatched Mr Lawrence Summers, Mr Rubin's deputy, to Japan to meet Japanese officials ahead of a weekend meeting in Tokyo of finance officials from the Group of Seven industrialised countries, and officials from some Asian countries. Mr Summers was due to leave yesterday, accompanied by Mr William McDonough, president of the Federal Reserve Bank of New York.
"It's a policy reversal, but I think a very healthy one," said Mr C Fred Bergsten, director of the Washington-based Institute for International Economics. The yen's weakness was threatening the stability of currencies in Korea, Taiwan, China and elsewhere. "We were very close to the risk of an outbreak of competitive depreciations," he said.
He said the US-Japan intervention should be continued and should be broadened to include the other central banks of the G7. It had to be backed by policy action by the Japanese to stimulate the economy through a fiscal reform, such as a temporary abolition of the 5 per cent consumption tax, and a fundamental restructuring of the banking system to deal with bankrupt banks and the overhang of bad debts.
