By Paul Blustein and Sandra Sugawara
Washington Post Staff Writers
Wednesday, August 12, 1998; Page A01

Deepening gloom about the Japanese economy sent the yen tumbling to an eight-year low yesterday, and stock markets plunged around the world -- including in the United States -- in a dramatic display of "financial contagion."

The rout in foreign markets triggered a morning drop of more than 250 points in the Dow Jones industrial average, amid mounting fears that Asia's troubles pose a serious threat to the earning power of U.S. corporations and, ultimately, the confidence of American consumers. The Dow average recovered somewhat in the afternoon and finished the day down 112.00 points, or 1.31 percent, at 8462.85. [Details on Page C8.]

Hardly a financial market was spared from the selling wave that started in Tokyo and swept across the world's time zones, continuing an erosion in prices that has afflicted a number of markets during the past two weeks. Particularly hard hit was Russia, where the main stock index plummeted 9.11 percent and authorities temporarily halted panicky trading. Russia's markets, which had dropped 9 percent on Monday, have failed to respond to a new International Monetary Fund-led bailout for Moscow announced last month.

Although the Asian crisis has sparked steep drops in markets elsewhere several times since its onset a year ago, the latest bout of contagion has raised the prospect that its effects are rapidly becoming more global in scope.

"The breadth of the volatility -- that's what's different," said Jeffrey Shafer, vice chairman of Salomon Smith Barney International. "You're seeing declines in markets even where it's very difficult to point to bad news -- and, in fact, even in the face of some reasonably positive news."

He cited Brazil, where stock prices slid 4.14 percent yesterday, the eighth straight day of decline, even though the government recently privatized the state telephone company and the reform-minded president, Fernando Henrique Cardoso, has been gaining in the polls.

The U.S. Treasury, which has been leading the Clinton administration's response to the crisis, was silent, although the White House did say President Clinton had discussed the market slide by phone for about 10 minutes yesterday with Treasury Secretary Robert E. Rubin and other advisers.

But other administration officials made it clear that Washington puts most of the blame for the latest global tremors on Japan, where the new government of Prime Minister Keizo Obuchi has drawn heavy criticism for failing to boldly address the troubles afflicting the nation's giant economy. Japan's gross domestic product -- the world's second largest -- accounts for more than 60 percent of Asia's economic output, and the prolonged stagnation there has imposed a drag on other economies, especially those of its neighbors.

"There was hope that their election would cause them to produce something -- and now there's significant anxiety that it won't," David Aaron, the U.S. undersecretary of commerce for international trade, said in an interview. "I think you've got to give them a chance. . . . We're talking to them daily on almost every level."

The administration, Aaron acknowledged, is growing increasingly concerned about the crisis, even though the U.S. economy continues to grow. "I don't want to cry wolf here, but we're nowhere near seeing light at the end of any tunnels," he said.

Many analysts agreed that the source of yesterday's market shudders could be traced mainly to Tokyo. In Mexico, for example, where stock prices sank 2.76 percent and the peso fell to its lowest rate ever against the dollar, the market's action "has very little to do with Mexico and everything to do with external factors," said Jorge Mariscal, an analyst at Goldman Sachs & Co. in New York. "The market is losing hope that Japan is going to do anything to restore growth and restructure its banking system, and it's worried that China is going to devalue its currency."

Speculation about a devaluation of the Chinese renminbi, which has intensified in recent days, has aroused fears that Asian currencies could suffer another round of declines as countries desperately seek to keep their exports competitive with China's. Such a development would clearly take a heavy toll on Latin American economies, Mariscal said, as their exports would be undercut as well.

Beijing yesterday reiterated its firm intention to maintain the value of its currency, which is not freely traded as most other currencies are. "There is no need to devalue the renminbi, and the renminbi will not be devalued," said Liu Mingkang, deputy governor of the People's Bank of China. Many economists agree that a devaluation is unlikely, because even though such a move might make Chinese products cheaper on world markets, it would raise the cost of machinery and technology that China needs to import.

But concern about the renminbi has been fueled by the weakness in the yen, which yesterday pierced a key psychological barrier by falling below the level it reached in mid-June, just before Washington and Tokyo joined in a surprise rescue operation for the Japanese currency. In late trading yesterday in New York, the yen was changing hands at 147.26 per dollar. The yen was at 146.16 to the dollar in early trading today in Tokyo.

The lower the yen falls, the tougher it gets for some crisis-stricken Asian nations -- notably South Korea -- to compete with Japan in global export markets. Accordingly, Asian stocks and currencies followed the yen downward yesterday. Hong Kong's benchmark stock index tumbled 3.62 percent, Singapore's fell 3.02 percent, and Malaysia's skidded 5.26 percent. European markets dropped next, with Britain's main stock prices falling 2.77 percent, France's 2.37 percent and Germany's 3.20 percent. South African shares suffered their biggest one-day loss since January, tumbling 5.11 percent.

Asian markets continued to fall in early trading today, except for those in Hong Kong and Indonesia, which were up slightly.

Among the chief factors behind the yen's weakness was growing skepticism about the political will -- and capacity -- of Obuchi's government to push an economic stimulus package and a banking reform program through the nation's parliament. Opposition politicians, who control the upper house of parliament, have attacked the government's banking plan as not tough enough, and chances appear to be fading fast for swift approval of a package of measures to clean up the banking system's hundreds of billions of dollars in bad loans. In addition, markets were shaken by the Monday bankruptcy of Mita Industrial Co., a maker of copiers, whose overseas operations were hurt by yen fluctuations. Mita is not a typical example of a "bubble" company -- such as those in real estate -- that borrowed excessively during Japan's go-go 1980s, so its collapse with debts of more than $1.3 billion was a bad sign for the banking industry, analysts said.

"Loans to Mita Industrial were probably classified as healthy," said Yushiro Ikuyo, a Commerz Securities analyst. The fact that business problems that did not seem extraordinary could lead to a bankruptcy of this scale "is a shock," he said.

"Bankruptcies in Japan are accelerating," said Noriyoshi Kobayashi, a manager at Teikoku Databank, a research company that tracks corporate failures. More troubling, he said, are the types of bankruptcies that are starting to occur, because manufacturers of finished products, such as Mita, are usually the last to go under during recessions.

In New York, Michael Scarlatos, a currency strategist at Bankers Trust Corp., warned that "the markets have lost patience with the lack of Japanese action." At the time of the joint U.S. Japan yen-buying operation in mid-June, he recalled, U.S. officials were quoted as saying that Japan had a "window of opportunity" to show that it was seriously tackling its problems. "The window of opportunity has been closed, as shown by the fact that the dollar's old high of 147 [yen] has been pierced," he said. "We are pioneering new territory, with an impatient market."

Blustein reported from Washington, Sugawara from Tokyo. John Ward Anderson of the Washington Post Foreign Service also contributed to this report from Mexico City.