By Paul Blustein and Steven Mufson
Washington Post Staff Writers
Friday, June 12, 1998; Page A21

The Japanese yen fell to an eight-year low against the U.S. dollar yesterday, driving down the prices of stocks and currencies around the world and prompting international financial officials to warn that Japan's economic troubles now threaten to tip Asia into a new round of crises.

Many investors dumped Asian stocks and currencies and poured the cash into U.S. Treasury bonds, which are considered a safe haven in times of turmoil. That helped drive U.S. interest rates lower as the yield on the benchmark 30-year Treasury fell to a record 5.65 percent. U.S. stock prices plummeted on fears that Asia's woes will hurt corporate earnings. The Dow Jones industrial average lost nearly 160 points, or 1.8 percent, to close at 8811.77.

Top U.S. officials spent the day warning that the United States has few if any options for dealing with this latest jolt to Asia's economies. U.S. Treasury Secretary Robert E. Rubin told a Senate hearing that the responsibility for stemming the slide in the yen and quelling the crisis rests squarely with Japan.

"I think the question is, what can we do?" Rubin said, rejecting suggestions that the United States might take action to halt the dollar's rise on currency markets. "The weakness of the yen reflects the economic conditions in Japan, and can only be remedied by restoring economic strength in Japan." He said it was more urgent than ever for Tokyo to revamp its ailing banking system and boost its flagging economic growth.

The Treasury chief's finger-pointing underscored the deepening concern among economic policymakers about the financial "contagion" that appears to be spreading with new virulence from one country and region to another. Russia is the latest nation to suffer a panicky flight of capital, and alarm has arisen this week that China and Hong Kong might feel forced to devalue their carefully-regulated currencies to keep their products competitive. A Chinese devaluation would almost certainly cause currencies in countries such as Thailand and Indonesia to fall anew, exacerbating their economic difficulties.

For the United States, the effects so far have been relatively mild. Exports to Asia have fallen at a time when domestic spending remains strong. But Clinton administration officials and many private economists fear that the economy would be hit harder by a deeper or wider crisis, which Japan's problems might spur.

Japan's anemic economy and sagging currency hurt its neighbors in two main ways:

Because Japan's high-tech economy is a major market for East Asian products, the fall in spending there dampens demand for Asian exports and diminishes recovery prospects in crisis-stricken countries such as South Korea and Thailand.

The lower the yen falls, the cheaper Japanese products become on world markets, which undermines the competitiveness of rival Asian goods. The yen fell yesterday to more than 144 per dollar. The yen has fallen by about 44 percent against the dollar since the spring of 1995.

The specter of a Chinese devaluation was one of the main factors behind yesterday's sell-off in Asian markets. Hong Kong shares fell for a third day, by 1.2 percent, to the lowest levels since February 1995. Thai stocks fell to a 10-year low, Philippine shares fell 4.6 percent and Japan's main stock index, the Nikkei, dropped 2.2 percent to a six-month low.

Korea's main stock index tumbled nearly 6 percent in early trading today, but indexes rose fractionally in Hong Kong and Indonesia. Japan's Nikkei was slightly lower as the yen declined further against the dollar.

In Beijing, China's Premier Zhu Rongji told American officials and visitors in private meetings this week that he believes Rubin should be more vigorous in urging Japan to bolster its currency to prevent wider economic chaos in Asia, diplomatic sources said.

Zhu said it was unfair that the United States stand back while the yen tumbles and at the same time press China to hold the line on the value of its currency to prevent a destructive spiral of competitive devaluations. Zhu said he believed that the United States was acquiescing to, or even encouraging, the yen's fall.

Publicly, though, the Chinese government focused its criticism on Japan, not the United States. At a regular Thursday afternoon press briefing, Foreign Ministry spokesman Zhu Bangzao said, "We hope Japan and the relevant countries can face reality and use courage and wisdom in taking effective measures to stop the further devaluation of the yen to create necessary conditions for the recovery of the economy."

China was "paying great attention to the continual fall of the yen's exchange rate," Zhu said, adding that the yen's weakness "is not conducive to the recovery from the financial turmoil in East Asia."

Japanese officials bristled at suggestions that the burden rests on Tokyo to save the region. "If there should be any steps taken to stem the decline of the yen, there should be some market intervention, and Japan can't do it alone," said Toshiro Suzuki, economics counselor at the Japanese Embassy here, referring to government purchases and sales of currencies to influence their value.

But Rubin dismissed intervention as "a temporary tool and not a fundamental solution," reflecting the long-standing Treasury view that in an era when trillions of dollars course through currency markets each week, governments are relatively powerless to affect exchange rates without changing their nations' economic fundamentals.

His comments helped drive the yen even lower -- and the dollar higher -- in afternoon trading yesterday because traders concluded there is little danger of intervention driving down the dollar. Rubin hastened to add later that he was not ruling out intervention as an option.

Other international economic officials agreed that the onus is primarily on Japan to strengthen the yen. Besides intervention, the only practical way Washington could bring the dollar down is by deliberately weakening the U.S. economy or generating inflation, thereby making U.S. investments less attractive. Japan, by contrast, can raise the value of its currency by lifting its economy out of the rut in which it has been stuck for most of the past seven years. Although Japanese officials are eager to see growth revive, their conservative instincts have tempered their willingness to take the drastic measures that many economic experts recommend.

In April, Tokyo introduced plans for its biggest economic stimulus package ever, including massive spending on public works and modest tax cuts. Japanese officials maintain that once the measures kick in they will gradually fuel consumer spending, but many analysts have concluded the package will only keep the economy from falling further rather than generating robust growth.

"What they did was pretty brave, with a package equal to 2.5 percent of gross domestic product, but it clearly wasn't enough," an international economic policymaker said. "And the more they go down, the more trouble they create in Asia."

Echoing Rubin, the official said that Japan also must take radical steps to revamp its financial industry, which has been reluctant to lend because banks are still saddled with massive amounts of bad loans. Tokyo has staunchly resisted U.S. advice to put ailing banks out of business, in part because of traditional Japanese abhorrence over layoffs and bankruptcies.

Japanese Prime Minister Ryutaro Hashimoto has hinted that he may be willing to consider more ambitious steps to address the banking troubles, but the government is almost certain to delay any action that might upset voters until after a July 12 election for the upper house of parliament.

"Until then, Japan is in a political straitjacket," said David Gilmore, an analyst at Foreign Exchange Analytics in Essex, Conn. "But in the meantime, we could easily slide into another round of currency contagion. In fact, we're in it already."