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Thursday, June 18, 1998 Published at 12:17 GMT 13:17 UK

Business: The Economy

Why the US intervened

The squeeze was on Wall Street

The dramatic turn-around in the fortunes of the the Japanese yen was also a major policy shift by the US government.

Only last week, US Treasury Secretary Robert Rubin said that there was no case for intervention and that Japan must sort out its own problems.

[ image: US Treasury Secretary Rubin changed his mind]
US Treasury Secretary Rubin changed his mind
But on Wednesday he said that the yen's decline was of "exceptional concern" as the US Federal Reserve Bank poured around $2bn into the market to buy yen.

The risks of a world-wide currency crisis, and its impact on Western markets, eventually outweighed the desire to maintain financial laissez-faire.

Falls on Wall Street on fears that the Asian crisis would hit corporate profits, was also a factor.

As the Deputy Thai Prime Minister Supachai Panitchpakdi put it, "The shock may spill over globally and menacingly, more than anything the world has seen for 40 years."

[ image: The Fed moved into the currency markets]
The Fed moved into the currency markets
Washington was playing a waiting game with Japan, trying to force a reluctant government to take stronger measures to reflate the economy ahead of important elections for the Upper House.

According to some reports, it was only after specific pledges on reform that the US government authorised the intervention.

The US has for a long time been trying to open up Japan's financial sector to international competition, hoping for a share of the lucrative pensions and fund management business.

It has also been urging a reform of the troubled banking sector, which has been burdened with bad debts - a legacy of the property bubble which burst seven years ago.

Reform might be modelled on the US Resolution Trust Company, a government body which acquired bankrupt savings banks in the US and sold their assets.

China's Key Role

Another crucial factor in US intervention was the increasingly strident concern in China over the yen.

Peter Jay, BBC Economics Editor, on the Asian crisis
As the second largest exporter in Asia, China's implicit threat to devalue its currency could have sparked another round of Asian sell-offs as other countries' exporters earnings were hit.

On Wednesday China's vice-minister for international trade, Sun Zhenyu, warned that China might be considering such a step.

The collapse of the Hong Kong stock market on the back of the yen's fall has also made it more difficult for the Chinese to raise international capital to restructure their over-manned state corporations.

China's threat carried added clout with the US as President Clinton is to visit Beijing next week.

The Chinese are hoping the summit will put the final seal of approval on China's membership in the World Trade Organisation which it has been wanting to join for several years.

China's intervention has given it a new clout in international financial markets, and sparked fears that it will now seek to dominate other Asian currencies.

Currency intervention not new

This is not the first time the US has intervened in currency markets to influence the yen.

In the l980s the US and other central banks moved to boost the yen as the dollar reached an all-time high.

More sporadic intervention also occurred in l995 to push the yen off its historic highs and on to the downward path.

But the history of interventions shows that action by central banks alone cannot reverse the fundamental weakness of a currency.

At best it can buy time to correct policy mistakes or change direction. If the speculators were given a sharp shock this week, the long-term outlook is still in the hands of the gods - or the Japanese.

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