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U.S. helps prop up yen
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June 17, 1998: 4:21 p.m. ET
Japan's currency rallies, U.S. bonds sink as Clinton shows urgency of yen plunge
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NEW YORK (CNNfn) - The United States rode to the rescue of the battered Japanese yen Wednesday in a dramatic shift from its recent hands-off approach.
Joining forces with Japan's central bank, the Treasury Department instructed the New York Federal Reserve to spend an estimated $2 billion to boost the value of the yen against the dollar -- the first U.S. intervention on behalf of the yen in more than six years.
Intervention is when central banks buy or sell a currency on the open market to affect its value.
Moves triggers rally on Wall Street
News of the intervention sent the value of the yen soaring to 137 yen to the dollar from 142 late Tuesday. It also fueled a strong rally on Wall Street as equity investors, who had feared the Asian economic crisis would worsen and the weak yen would eat into the bottom lines of large multinational corporations, breathed a sigh of relief.
By late afternoon, the Dow Jones industrial average surged 163 points to 8,828.
The dollar's skid quickly stung the bond market, pushing the yield on the benchmark 30-year bond up to 5.74 percent as its price slid 1-13/32 of a point. Many investors feared that Japan might sell U.S. bonds to replenish its dollar reserves after Wednesday's intervention.
The Japanese currency had fallen to its lowest level in eight years recently on fears that the ailing Japanese economy would spark another round of Asian financial shocks.
Treasury Secretary Robert Rubin said Washington stood ready to continue supporting the yen if needed. However, he said Wednesday's action did not mark a change in U.S. dollar policy.
"The answer to that is no," Rubin said in response to a question at a White House briefing. "I think the strong dollar policy has served us exceedingly well over the past several years and still does."
"The actions that were taken and announced both in Japan and the United States today were very much animated by concern for Asia, the other parts of Asia, but has nothing to do with our more general policy with respect to the dollar," he said.
Traders said the intervention appeared limited to U.S. and Japanese authorities, without a hand from other big industrialized countries. Britain said the action was a U.S.-Japanese initiative and wished it every success.
"This is a clear shift in U.S. policy and it probably indicates that the U.S. has received some concessions from Japan," said Henry Willmore, senior economist at Barclays Capital in New York.
Clinton encouraged by Japan's pledge to get economy going
President Bill Clinton said the action was taken to show Washington supported Japan as it takes steps to revive its economy. Clinton said he had spoken with Japanese Prime Minister Ryutaro Hashimoto shortly before midnight Tuesday to express U.S. support for Tokyo.
"I was very encouraged by the Prime Minister's statement that he intends to pursue aggressive reform of their banking institutions and intends to do the things that were necessary to get the economy going again," Clinton said at the White House.
Japan's economy, the second largest in the world, has tumbled into recession this year, shrinking at an annual rate of 5.3 percent in the first quarter of 1998.
Worried that the Japanese crisis could spread elsewhere in Asia and ultimately affect the U.S. economy, Washington has repeatedly called on Tokyo to do more to revive its economy.
But it has been frustrated with Japan's reluctance to commit to specific plans. An additional factor in the U.S. decision to go to Japan's rescue was fear that the Japanese currency slide would force its huge neighbor China to devalue its currency. China had warned that it could not withstand the economic pressure from the Japanese situation much longer.
"There's one other reason we're doing this -- a very important reason -- and that's the Chinese," said a U.S. administration official, who asked not to be identified.
The official said Washington wanted to avoid at all costs a devaluation of the Chinese currency, the yuan, because that could have set off a chain reaction throughout Asia.
Sagging yen pressuring Asia
The sagging yen and the decline of Japan's economy have put additional economic pressure on already struggling nations across the Asian continent.
Exporters in countries such as South Korea, Indonesia or Thailand -- at the receiving end of multibillion dollar bailout deals -- need the Japanese market to sell their products, but are unable to do so since the weak yen makes their products more expensive for the Japanese to buy.
In a joint statement, Clinton and Hashimoto said the two economic superpowers had to act together to end a nosedive in the yen.
"The president and I are delighted to see that the United States and Japan have cooperated in the exchange markets to support a strong, stable yen," Hashimoto said.
The U.S. Treasury confirmed initial intervention at 142 yen. The Fed also reportedly made purchases at 141 yen, 140 yen and 138.50 yen.
Summers heads to Japan
The statement by Clinton and Hashimoto came a few hours after Japan's parliament passed a special 4.65 trillion yen ($32.7 billion) supplementary budget that is part of a record 16.65 trillion yen economic stimulus package announced in April.
The statement also came a day ahead of a hastily arranged visit to Japan by U.S. Deputy Treasury Secretary Lawrence Summers that will include a meeting of finance officials from the Group of Seven industrialized nations.
Economists' reactions were mixed, with many stressing Japan still needs to get its house in order.
"I think the Japanese are in a very tough dilemma," said Clyde Prestowitz, president of the Economic Strategy Institute.
"They don't seem to be able politically to take the steps that are necessary to get their economy stabilized. In fact, it's not even clear that they entirely recognize the danger that the falling yen poses to the rest of Asia and in fact the rest of the world economy."
Alison Montgomery, a currency economist with I.D.E.A., said it is unclear whether the Treasury's move is a sign the yen has peaked or amounts to little more than a "smoothing operation" by the government.
"At this point, we don't think the U.S. will abandon the strong dollar policy; it is just to add stability " she said. "But the fundamentals in Japan haven't changed, we still need to see significant action from the Japanese authorities."
A Treasury official said the department last intervened in the currency markets to prop up the dollar against the yen in August 1995. The last time the United States stepped into to buy yen was in February 1992.
A falling yen lowers the price of goods from Japan and thus helps keep a cap on U.S. inflation. 
-- from staff and wire reports
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