Can This Yen Be Saved?

By Adam Zagorin/Washington With Reporting By Hiroko Tashiro/Tokyo and Jaime A. FlorCruz and Mia Turner/Beijing

As Bill Clinton prepared to jet to Beijing this week, the most crucial diplomacy in Asia was taking place over the telephone wires between Tokyo and Washington. It led to a $2 billion flyer by the U.S. Treasury to support the Japanese yen, which briefly pumped up stock markets and threw the Clinton Administration into the treacherous depths of the international money markets. It was the first time in three years that the U.S. had jumped into the currency markets, and it put Washington's credibility--and that of Treasury Secretary Robert Rubin--on the line in the global currency crisis.

Rubin, a former currency trader, issued the buy order on the yen as it plummeted to 146 to the dollar, threatening to kick off a new round of falling-currency dominoes in Asia. The big risk was that it would force Chinese monetary authorities to devalue the renminbi and ultimately turn Asia's deep economic slump into a global recession.

Ironically, it was Rubin's remarks before Congress two weeks ago that seem to have triggered the latest spiral. Appearing before the Senate Finance Committee, he was asked why the U.S. was doing nothing to support the yen. "Intervention is a temporary tool," he replied. "The whole answer lies in Japan doing what it needs to do." As he continued to speak, an aide passed him a note saying the yen had suddenly begun to drop. Apparently assuming that Washington would remain on the sidelines, dealers had sold billions of yen, sending the currency to an eight-year low.

The yen dump lasted nearly four days, as urgent calls flew between Treasury and Tokyo's Finance Ministry. In close consultation with Federal Reserve Chairman Alan Greenspan, Rubin pushed Finance Minister Hikaru Matsunaga to deregulate his economy and jump-start it with permanent tax cuts. Especially important to Rubin was a Japanese pledge to abandon its so-called convoy system, whereby strong banks must support weaker ones no matter what their financial condition. Convoying has left the banking system as a whole with some $600 billion in bad debt. The question was what the Clinton Administration was prepared to do in exchange for fast Japanese action.

The issue remained undecided last Tuesday at around 5:30 p.m. as an Oval Office meeting began. The Japanese were still balking. Clinton sat at his desk with chief of staff Erskine Bowles at his side. National Security Adviser Sandy Berger, Deputy Treasury Secretary Lawrence Summers and White House economic adviser Gene Sperling discussed whether the President should talk to Prime Minister Ryutaro Hashimoto. Rubin was off to one side, pacing quietly. Asked for his recommendation, he ran his fingers through his hair, then somberly replied that intervention by itself would accomplish little. What really mattered was concrete Japanese actions. He headed back to Treasury. At 9 p.m., a Rubin aide called the White House. After more talks, Japanese Finance Minister Matsunaga had outlined specific actions, including a promise to end the convoy system. Rubin okayed the yen buy.

A few hours after midnight, Washington time, financial markets opened in Europe. The Fed and the Japanese central bank began buying yen. As traders scrambled to adjust, the yen jumped 5.2% for the day. In Japan an upbeat Hashimoto pledged "every effort" to restore the country's debt-burdened banking sector and "open and deregulate its markets."

The promises all sounded familiar. Which means that Rubin's latest gambit could prove little more than a stopgap. Rubin told TIME, "This is a very complex set of issues that will now take some time to work out." U.S. Deputy Treasury Secretary Summers, in Tokyo late last week to follow up on the deal, indicated that the U.S. is prepared to support the yen again if necessary, while the Japanese hinted that they would announce still more reforms. Otherwise, cautions John Lipsky, chief economist of the Chase Manhattan Bank, "it's inevitable that traders will test the yen's strength again." And soon.

--With reporting by Hiroko Tashiro/Tokyo and Jaime A. FlorCruz and Mia Turner/Beijing