By Paul Blustein and Keith B. Richburg
Washington Post Staff Writers
Tuesday, June 16, 1998; Page A01

Stock markets plummeted in the United States and around the world yesterday as Asia's economic troubles deepened, prompting urgent international calls for Japan to shore up its economy and stave off a possible global financial crisis.

British Prime Minister Tony Blair told fellow European Union leaders at a summit meeting in Wales that the world economy faces its greatest risks in almost two decades because of the problems in Asia. "Our economies will not emerge from this turmoil without being affected by it, and we have to decide how we intend to react," a British spokesman quoted Blair as saying. The EU leaders appealed to Tokyo for swift action to reform the ailing Japanese banking system.

Reflecting the Clinton administration's mounting anxiety and frustration over the spreading impact of Japan's troubles, a senior U.S. official said yesterday that communications between Washington and Tokyo "are getting testier, and there is pessimism here about whether Japan has any conception about how to stop digging the hole it's in."

The Dow Jones industrial average dropped by 207.01 points, or 2.3 percent, to close at 8627.93. It was the biggest one-day decline since January, and provided some of the strongest evidence to date that U.S. financial markets are not invulnerable to the turbulence overseas. [Details, Page C1.]

"Investors in the U.S. stock market are starting to worry very seriously that the Asian contagion is now spreading to U.S. stocks," said economist Ed Yardeni, chief economist at Deutsche Morgan Grenfell Inc. "It's increasingly clear that Asia is not a problem that's going to go away anytime soon."

Sparking the sell-off in New York and other markets was a renewed fall in the Japanese yen, which declined as low as 146.57 yen per dollar, its lowest since August 1990. Japan's weakening currency puts pressure on the economies of its hard-hit Asian neighbors, because the lower the yen falls, the cheaper Japanese products become and the greater the difficulties Asian firms face in remaining competitive. Moreover, the recession in Japan -- the world's second-largest economy -- deprives Asian countries of one of their most important export markets.

Stock prices yesterday plunged 5.7 percent in Hong Kong, 5.7 percent in Thailand, 4.8 percent in South Korea, 3.5 percent in Singapore and 1.3 percent in Japan. Many Asian stock markets are now below the depths they hit late last year. Hong Kong's market is down more than 50 percent from where it stood at the start of the Asian crisis last July.

Asian markets continued to drop at the opening of trading today but recovered somewhat later in the morning. In Hong Kong, stock prices were up 1.37 percent; in South Korea, 0.26 percent; and in Japan, 0.13 percent. Stock indexes were marginally lower in Singapore, Indonesia and Malaysia.

"This is a big fall," said James Osborn, head of sales for Barings Securities Ltd. in Hong Kong. "The only two things that are record highs this year are unemployment and rainfall."

Yen's Downward Force The yen's steep slide continued yesterday, sending Asian currencies and stock markets tumbling. U.S. dollars per yen Yesterday: $0.0068 (146.17 yen per dollar) Asian stock market declines at closing yesterday: Indonesia, -0.5% Malaysia, -4.3 Philippines, -4.5 Singapore, -3.5 Thailand, -5.7 Hong Kong, -5.7 Japan, -1.3 Taiwan, -2.3 South Korea, -4.8 SOURCES: Bloomberg News, Reuters

In a classic manifestation of how contagion spreads from market to market, Latin American shares were also battered, with Brazil's main stock index dropping 5.3 percent and Mexico's by nearly 4 percent. In Russia, which is undergoing a financial crisis of its own, shares fell 7.3 percent to the lowest level since October 1996. European markets were hit the least, with London stocks falling 0.94 percent and the Frankfurt market sliding by 0.89 percent.

The swooning markets focused on the fact that Asia is now in the midst of a deep and prolonged recession that poses a major threat to growth elsewhere in the world, including the United States.

Until a couple of months ago, many economists and market analysts were predicting that East Asia could start to see an economic turnaround by next year. But thanks in part to the increasingly gloomy outlook in Japan, where officials confirmed Friday that the country is in recession, most forecasters now contend that the region's crisis will last much longer and exact a much more painful human toll as a result.

[Meanwhile, the Bank of Japan yesterday lowered its assessment of the economy, saying employment and income have shown "significant deterioration," Bloomberg News reported. In its economic report for June, the central bank said weaker domestic demand may push prices lower, signaling growing concern about deflation. Prices are likely "to be weak for some time," the bank said.]

The Clinton administration has been exhorting Tokyo all year to take bold action to stimulate the Japanese economy. But although the government of Prime Minister Ryutaro Hashimoto introduced its biggest stimulus package ever in April -- the nation's parliament approved it yesterday -- financial markets have been skeptical that the measures, which are heavily tilted toward public works spending, will lift Japan out of its seven-year period of stagnation.

Moreover, Tokyo has resisted Washington's pleas for a radical restructuring of the moribund Japanese banking system. Japanese banks are burdened with hundreds of billions of dollars in bad loans that make them extremely cautious about advancing new credit, even to healthy businesses. Japanese financial authorities, who abhor layoffs and bankruptcies, are deeply reluctant to allow the widespread bank failures and loan foreclosures that a drastic revamping of the system would entail.

Japan's approach is evoking unusually sharp rebukes from officials in neighboring countries. "Japan must do more to help stabilize the region," said Tung Chee-hwa, Hong Kong's chief executive, in a speech Sunday in Sydney. "There needs to be a degree of urgency in stabilizing the yen."

Investor nerves have been particularly frayed in Hong Kong because of fears that the falling yen may prompt China to devalue its currency, the renminbi, in order to keep Chinese exports competitive with other Asian goods. That would almost certainly plunge the region into a new round of currency crises, and would pose an extraordinarily severe test for Hong Kong's cherished peg of its currency against the U.S. dollar.

Chinese officials have repeatedly insisted that they have no intention of devaluing the renminbi, which is also called the yuan, and in his speech Tung reiterated his long-standing position that "the Hong Kong dollar will stay where it is, firmly linked to the U.S. dollar."

But some regional analysts and fund managers contend that Beijing will eventually devalue because of the need to boost exports as its economy slows and joblessness increases. Their views were reinforced yesterday by articles in China's leading financial newspapers sharply criticizing both Japan and the United States for the yen's weakness and the dollar's strength.

"The falling yen has already put immense pressure on the Chinese renminbi currency, which has stayed firm throughout the Southeast Asian financial crisis," said the Financial News in a front-page commentary.

Another paper, the Financial Morning Post, focused its attack on Tokyo, echoing similar but milder remarks by Chinese officials. "The yen's fall highlights an extreme lack of farsightedness on the part of the Japanese government," it said in a commentary.

Many analysts and officials attribute such comments to Beijing's desire to get credit for holding the renminbi stable, rather than to any serious intention to devalue the currency.

"I think China wants to act responsibly in Asia, and I think China understands that if it devalues, it will spark another round of devaluations," said Charlene Barshefsky, the U.S. trade representative, in an interview. "So it is in their interest to try to stabilize the situation." The Chinese complaints about the yen, she added, may be partly "tactical, to elicit sympathy in the hope of being rewarded," perhaps in trade negotiations with Washington.