One of the most remarkable aspects of a roller-coaster week in Asian markets during which the yen dipped to record lows before joint US-Japanese intervention, was the role of China, which intervened with devaluation threats and appeals for US help, to spur Washington and Tokyo into action to prop up the Japanese currency.
The resulting recovery of the yen emboldened Japanese Prime Minister, Mr Ryutaro Hashimoto to make a renewed commitment yesterday to review tax rates and clean up the country's bad loans mess, and to appeal to Japanese people to regain their self-confidence and make the nation an economic powerhouse again.
The joint US-Japan intervention on Wednesday is believed to have been masterminded by Japan's vice-finance minister, Mr Eisuke Sakakibara, known as "Mr Yen". But for the first time Japan can thank communist China, the second-biggest economy in Asia, for playing a major role in getting the US to act in its favour.
Beijing dropped a number of heavy-handed hints during the week that it would devalue its yuan and open up a new and more dangerous phase in the Asian crisis that could affect Wall Street. Economists say a Chinese devaluation would have caused a devastating round of competitive devaluations in the region and dashed hopes of an early recovery from its financial turmoil.
On Wednesday, after a telephone conversation between US President Bill Clinton and Mr Hashimoto, the New York Federal Reserve spent $2 billion (£1.42 billion) and the Bank of Japan an estimated $4 billion to support the yen, which at one stage had dropped as low as 146 to the dollar.
It quickly bounced back by 10 points and gave Asia and its stock markets the first good news in weeks.
With Mr Clinton due to arrive in China next week, the timing could not have been better for Beijing, which has, in effect, made a major play to join the G7 group of industrialised nations.
China has established through the crisis a more important role in international financial affairs and demonstrated its ability to maintain stability amid the chaos of south-east Asian markets.
Its tactics were deft. As the yen plummeted, Chinese officials warned of growing pressures on the yuan, which if devalued would likely have pulled down the Hong Kong currency with it.
Publicly Mr Dai Xianglong, governor of the People's Bank of China, warned of a Chinese devaluation by saying the yen's drop was having a severe impact on China's trade and investment.
Then finance minister, Mr Xiang Huaicheng stepped up the pressure, saying that the yuan could be undermined if China missed this year's 8 per cent growth target.
On Tuesday, China officially urged the US and Japan to "muster the courage and wisdom to face reality and take effective measures to stop the yen's slide". Privately, two top Chinese bankers are reported to have warned Washington that if the yen hit 150 the Chinese currency would have to be devalued. All this apparently forced the US, which had failed to respond to Tokyo's pleas for help because of Japanese inaction over its economy, came in from the sidelines.
Mr Dai yesterday praised the moves by Japan and the US. He also reaffirmed that China would not devalue its currency. "It's unnecessary to do that," he said.
He provided the region with more reassurances by saying that steps taken by Beijing to reach the growth target of 8 per cent were taking effect. China's economy grew by 7.2 per cent in the first quarter, down 1.6 per cent. In Tokyo, Mr Hashimoto told a news conference that "to spark a rebound in the stalled economy, I will do my best to help to write off bad loans, achieve growth driven by domestic demand, open Japanese markets further and promote deregulation".
Tomorrow, Japan will seek to maintain the momentum when it hosts an emergency meeting of the deputy finance ministers of the Group of Seven (G7) along with other Asian nations and officials from the International Monetary Fund, the World Bank and the Asian Development Bank. It will be attended by US Deputy Treasury Secretary, Mr Lawrence Summers.
Mr Hashimoto said he was "happy with the fact that the joint intervention was appreciated by the market". Japan officially went into recession last week after two quarters of negative growth and the weakness of its banking sector and the falling yen had spread fears throughout the world of a global recession.
Japanese vice-Finance Minister, Mr Koji Tanami, said yesterday the co-ordinated currency intervention by Japan and the US had sent a message to financial markets that the two economic powers were co-operating strongly.
The strengthening yen was good news for South Korea, whose hopes of exporting its way out of a severe economic crisis had been badly dented by the fall in the value of the Japanese currency. Some 40 per cent of South Korea's exports compete directly with Japan. The yen, which soared to 80 per dollar in May of 1995, slipped to an eight-year low of 146.15 against the dollar on the New York market this week. The yen's depreciation in the last four years, which favoured Japanese exports, was a significant factor in forcing South Korea to seek a $58.35 billion bailout package from the IMF last year, economists say.
