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World: Falling Yen Poses Grave Threats

Prague, 9 June 1998 (RFE/RL) -- The fall in the value of the Japanese yen in the last few days threatens to open an entirely new phase in Asia's financial crisis -- one with potentially grave consequences for the rest of the world.

The yen has crashed through the psychologically-important barrier of 140 to the dollar, its lowest point for seven years. Some experts say there is nothing now to stop the yen free falling.

This continuing slide is serious enough in itself. It reinforces international and domestic lack of confidence in prospects for Japan's economic recovery, while at the same time making Japanese exports cheaper, thus able to undercut other countries' products.

But beyond that, the real danger is that Asia's other giant, China, will de drawn into the downward spiral and will devalue its own currency, the yuan, as well as the Hong Kong dollar. Other regional currencies would probably also be drawn into the vortex.

The chief analyst in Germany for the Industrial Bank of Japan, Adolf Rosenstock, says China is feeling the pressure.

Now China is coming under pressure, it is seeing exports tumble, and is losing competitiveness. He says he believes China is already in a de facto recession, even though the authorities do not admit to this, and do not allow the statistics to show it. If the Chinese authorities should come under social and political pressure, particularly social pressure, they will opt for the softer option, which is to undertake a new devaluation.

Rosenstock recalls that some three years ago China devalued its currency by some 30 percent. It thereby gained strongly in competitiveness against its regional rivals and made large strides into the global economy with soaring exports. That move damaged all the other exporting nations of the region. But after last year's steep devluations in the other Southeast Asian currencies, China's relative advantage was washed away. Despite China's statements that it will not devalue, a falling yen now might well prove too much for it. Rosenstock says that in a round of devaluations, in the end all countries lose.

He describes as the "utmost risk and danger" the possibility that the turmoil will reach the United States and Europe, thereby plunging the world into recession.

There is little scope for positive action to ward off the danger. It's like a person staring at a snake which is poised to strike, and being powerless to prevent it. He says the danger must be allowed to run its course. His advice is that monetary authorities in the major economies can help by doing precisely nothing -- nothing, in the sense that they should not increase interest rates to curb inflation. They should regard inflationary tendencies as much the lesser evil which must be tolerated to achieve the stability of the world financial system.

Central banks in Europe and the U.S. are very much aware of this and have not hiked rates in the past. A limited rate rise in the United States would be very healthy for the domestic economy as a pre-emptive strike against inflationary tendencies, But the international ramifications of such a move could be disastrous, so the U.S. authorities are not doing it. For Europe the same applies.

All in all, it seems that the Asian crisis has not yet lost its capacity to surprise a nervous world.