BBC News' Peter Morgan on President Clinton's efforts on behalf of the yen

Prime Minister Ryutaro Hashimoto said that the supplemental budget would give a strong boost to demand, pledging "bold measures to achieve a strong economic recovery." Officials said a permanent tax cut was under consideration.

He told a nationally televised press conference that the government would move decisively to "carry out the disposal of bad loans to stabilize the financial system." Japanese banks have an estimated ¥771 trillion in bad debts..

US Deputy Treasury Secretary Lawrence Summers is on his way to Tokyo for further talks, which will be followed by an emergency meeting of the G7 finance ministers at the weekend.

His boss, US Treasury Secretary Robert Rubin, said that it was now up to Japan to sieze the opportunity to resolve the crisis. "The absolute key is that the Japanese government take the necessary action with respect to their economy," he said.

The Japanese currency strengthened dramatically on Wednesady and was maintaining its gains against the dollar on Thursday as the Tokyo Stock Exchange saw significant rises.

The BBC's Tokyo correspondent Juliet Hindell: "positive reaction"

The US and Japan spent more than $6bn on Wednesday trying to push up the Japanese currency from a damaging eight-year low.

At the end of the trading session in Tokyo the stock exchange was up 646 points, or 4.4%, to 15,361. Stocks in Korea rose 7%, while the Hong Kong market recovered by 15% in past two days.

In late morning trading in London, the yen was trading with the dollar at ¥136.85 - far better than the ¥146 rate that prompted Washington's move.

Busy days: Tuesday $-¥146, Thursday $-¥136

President Clinton said the US had intervened in co-operation with the Japanese authorities to ensure economic stability in Asia.

He said the US stood ready to do more to support "aggressive measures" promised by the Japanese government to boost the country's economy and restructure its financial institutions.

Bill Clinton voices his support for Japan's reform efforts

Mr Hashimoto said he and President Bill Clinton had consulted by telephone on Wednesday, and that Japan realised a revival of its economy was "urgently needed."

Malaysian moves

Other Asian countries also moved to stimulate demand in their domestic economies.

In Malaysia, Deputy Prime MInister and Finance Minister Anwar Ibraham announced a $1.8bn package to increase spending on public works projects. The Asian economic crisis has squeezed the Malaysian economy, which contracted by 1.8% in the first quarter of 1998, and cut government revenues.

The government intends speeding up the building of housing, bridges, and water supply systems "to increase the pace of national economic recovery," he said.

The yen crisis

The yen's weakness had caused a slump on Asia's stock markets. The region's economies depend on Japanese buying power to drive their export industries.

What's the economic outlook

The US intervention on the currency markets may have come just in time.

Politicians, economists and investors all had worried that the yen's slide might force China to devalue its currency, the yuan.

This could have triggered another round of competitive devaluations across Asia, with devastating effect on the world economy.

Jason James, from James Capel stockbrokers, Tokyo: "Intervention is a holding operation"

On Wednesday a senior Chinese official acknowledged for the first time that his government was considering making "adjustments". Until then the Chinese government had insisted that it would not devalue the yuan.