U.S. acts to halt plunge of yen Stock market jumps as Treasury sells dollars to aid Tokyo

'Currencies must stabilize

June 18, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

The stock market rebounded sharply yesterday after the Treasury Department suddenly reversed course and began intervening in international currency markets to stabilize shaky Asian economies.

Yesterday, the Federal Reserve Bank of New York, the Treasury's agent in the world currency market, sold dollars and bought yen, which slid to an eight-year low against the U.S. currency on Monday.

The U.S. move was prompted by fears that the yen might continue to fall, burying the country deeper in recession and damaging the economies of China and other Asian countries as well.

The intervention, coupled with Japanese promises to address the deepening banking crisis there, immediately helped strengthen the yen. By day's end it took 136.37 yen to buy $1, compared to 143.47 yen on Tuesday.

Early today, the dollar was sharply lower against the yen in Tokyo, and stock prices rose. The dollar bought 135.72 yen in early trading, down 6.28 yen from 142.00 yen late yesterday in Tokyo and below its New York rate of 136.37 yen late yesterday.

Economists praised the U.S. intervention. Although they said it would only have a temporary effect, it will give Japan more time to solve its economic problems, and could help stop price-cutting by Asian companies that has hurt U.S. profits.

"This makes some sense to me," said David Orr, economist at First Union Corp., based in Charlotte, N.C. "If they [Japan] are ever going to get out of this downward spiral, currencies have to stabilize."

It made sense to investors, too. Across the board, key indexes jumped on the news that the Treasury Department was backing Japan. The Dow Jones industrial average leaped at the opening bell and closed up 164.17 points, to 8,829.46. The Standard & Poor's 500 index rose 19.51 points, to 1,107.10. Even technology stocks, which had been battered in recent weeks, surged on the Nasdaq composite index to 1,776.40, up 23.28 points.

The reversal came after stocks were hammered on Monday on fears that Japan's economic crisis might be worsening and that its problems could drag China and other Asian countries down with it.

The Dow, which is the most closely watched index, slid 207.01 points Monday after markets in Asia tumbled.

Yesterday's announcement by the Treasury came as a surprise to analysts. On Friday, Treasury Secretary Robert E. Rubin said there would be no intervention to bolster the sagging yen. But yesterday, he retreated, saying that Japanese Prime Minister Ryutaro Hashimoto had outlined plans to "restore the health of the Japanese financial system and to strengthen domestic demand."

The Clinton administration is worried about the weak yen because it could adversely affect the U.S. economy.

The falling yen has been a boon to consumers by making a variety of products -- ranging from automobiles to televisions and VCRs -- cheaper. However, there is a fear that the Asian companies will flood the market with inexpensive goods, ultimately costing American jobs and hurting U.S. corporate profits.

'Sort of a 2-edged sword'

"If the dollar gets too strong, we can't sell anything overseas, and I don't have a job anymore," said David Wyss, chief economist at Standard & Poor's DRI in Lexington, Mass. "It is sort of a two-edged sword. The idea is not for the dollar to be strong or weak; it is for the dollar to be at the right spot so we remain competitive.

"U.S. companies are concerned they are losing too much market share to Japanese firms," he added.

Another reason the United States was forced to intervene is that Japan's economy dominates the entire Asian region, experts said. It is the world's leading exporter and its second largest economy with a gross domestic product of $4.2 trillion, compared with the United States' $8.1 trillion. It is also a major investor in U.S. bonds.

There are fears that problems in Japan will spill into China, whose economy is already slowing down. "There are rumors that the Chinese are very distressed by the decline in the Japanese yen because it is putting enormous pressure on their ability to export," Orr said. "They [Treasury] are probably trying to send a signal to China that we are good partners."

The U.S. intervention is not enough to solve Japan's economic problems, which experts said yesterday requires a major overhaul. They said the economy has been badly mismanaged, and Japan's banking system is in disarray.

'Disappointed' in Japan

"We sadly have been disappointed in what the Japanese haven't done," said David J.L. Warren, portfolio manager at Rowe-Price Fleming in London. "The perception must be increasing in Japan that their problems have not been faced."

Warren said Rowe-Price Fleming, which is partly owned by Baltimore-based T. Rowe Price Associates Inc., has reduced its investments in Japan by as much as $1 billion this year.

He applauded the U.S. intervention, saying it will smooth the yen's fall temporarily and prevent panic.

"Beyond that, the yen will not stabilize unless there are suitable and substantial changes in economic policy," he said.

Many economists are not optimistic, however. They said Japan continues to prop up troubled companies because the government is reluctant to let them fail.

"I am afraid this [Japan's economic problems] may take years, not months, to solve," said Sung Won Sohn, chief economist at Norwest Bancorp in Minneapolis. "We are talking about changing cultures and habits."

Sohn said he was in Japan two weeks ago visiting friends, and the mood was "bleak."

"It is very similar to the Depression we went through in the 1930s," he said. "Consumers are not spending their money, businesses are laying people off."

Orr, the First Union economist, said the United States can't continue buying yen for long. "It is very short-term," he said. "You use up your bullets real quick."

Pub Date: 6/18/98

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