By Sandra Sugawara
Washington Post Foreign Service
Wednesday, June 3, 1998; Page C15

TOKYO, June 2—Troubled Asian economies are making progress in their rehabilitation efforts, Stanley Fischer, the number two official at the International Monetary Fund, told an international economics symposium here today.

His comparatively optimistic assessment of recovery in the region was at odds with many private forecasts that Asia could be headed into a new period of economic turmoil. As evidence, they noted that the yen fell to a seven-year low this week.

Fischer said that the political transition in Indonesia meant "there is a prospect of a return to the IMF program taking place reasonably soon." He added that South Korea and Thailand were "well on their way" to stabilizing their currencies and were promoting financial and corporate restructuring.

"If the external environment stays quiet, then we can expect continued progress with a resumption of growth in Korea and Thailand likely toward the end of this year or possibly early next year, and from there on out, things would begin to look better, although it is always the case that unemployment lags," Fischer said.

But other analysts said that with the dollar hitting 139.75 yen in early transactions in Tokyo before falling back, the likelihood of things staying calm was fading. The dollar dropped back to the lower 139 level (138.83 yen in late New York trading) only after Japanese news reports that deputies for the Group of Seven finance ministers would meet in Paris next week and discuss ways to stop the yen's plunge.

Fears are mounting that Japan's currency will keep falling because of continuing pessimism about Japan, triggering another round of currency turmoil in Asia.

Currency traders say that if the G-7 fails to do something next week to defend the yen, the dollar may well pass the 140-yen line. A growing number of analysts are particularly concerned about the impact a further yen devaluation would have on China.

"The view is widely held in China that, if Japan's economy remains weak, Asia will have difficulty recovering from its economic morass," Morgan Stanley economist Andy Xie wrote in a recent report.

Japan is 70 percent larger than the rest of Asia combined in economic terms and twice as large in terms of the banking system, Xie wrote, and is the main source of foreign capital for the region: "The ominous descent of the yen is, therefore, viewed with alarm in China."

Analysts said China's commitment not to devalue its currency has hurt its exports, which have become more expensive because of the currency fluctuations.

Fischer sought to calm market fears of a devaluation in China. "The Chinese authorities have left no doubt that they understand the importance of not devaluing, and they've left no doubt about their determination not to do so," he said.

Fischer said Chinese authorities understand that if they devalue their currency, it could set off another round of currency devaluations throughout the region.

It was a series of rapid currencies devaluations last summer and fall that plunged Asia into economic turmoil. The plunge in the value of the Thai baht, the Korean won and the Indonesian rupiah made it harder for Thai, Korean and Indonesian companies to service their dollar-denominated debts and caused the cost of imported materials and equipment to jump.

Eventually the crippled banking system stopped lending to many customers, meaning companies had trouble getting routine credit lines to run their operations.

Despite Fischer's optimistic words, many analysts say the situation is far from turning around.

Stephen Marvin, an analyst at Ssangyong Investment & Securities Co. in Seoul, noted that South Korean banks continue to bail out large, ailing conglomerates. Recently creditors agreed to give Dong Ah Construction Industrial Co., the country's 10th-largest conglomerate, $433 million in emergency loans, arguing that its collapse would endanger the financial system. But Marvin said that a bigger threat to the banking system is the refusal of banks to cut off money to companies without the cash flow to support themselves.

Marvin estimates that the total bad debt of South Korea's financial sector will rise by 68 percent this year to $123 billion, which is equivalent to 41 percent of the nominal 1997 gross domestic product of South Korea.

Bank restructuring in Thailand also has gone slowly, creating a credit crunch. The government recently said it expected the economy to contract 4 percent to 5.5 percent this year, worse than the 3 percent to 3.5 percent previously anticipated.

A surge in exports, made cheaper by the falling currencies, was supposed to be reviving the Thai and South Korean economies by this summer. But the banking crisis has made it hard for exporters to get money, and Japan's economic problems have shrunk a key export market.

Meanwhile, some other countries that have so far avoided the worst of the crisis are now finding that their economies are contracting. Hong Kong announced that its economy shrank by 2 percent in the first quarter of 1998, and Malaysia's economy declined by 1.8 percent.

Malaysian Prime Minister Mahathir Mohamad, who also participated in the symposium, was asked why he followed some IMF prescriptions but did not formally ask the organization for help. He replied that Malaysia appears to be "following the policies of the IMF because frankly we feel threatened. We are told if we don't do these things, then our currencies would be depreciated further."

But Mahathir said he considered the IMF programs damaging. "When you raise interest rates and squeeze credit and increase taxes, which is the standard formula for all countries having problems like that, the only result is that companies go bankrupt. And when companies go bankrupt, countries eventually go bankrupt," he said.