By Paul Blustein
Washington Post Staff Writer
Tuesday, August 4, 1998; Page E01

Seven weeks after the United States and Japan launched a surprise rescue of the yen, the Japanese currency yesterday fell close to its eight-year low, reflecting growing doubts among investors about Tokyo's ability to overcome its economic woes.

Late yesterday, the yen was trading at 145.52 yen per U.S. dollar, compared with 144.66 yen per dollar Friday. That's uncomfortably close to the yen's weakest rate in eight years of 146.78 yen per dollar, a level reached on June 16, the day before American and Japanese monetary authorities joined in a massive yen-buying, dollar-selling operation.

The latest swoon in the yen, like the one in mid-June, is an ominous sign for the Asian financial crisis because of the enormously important role Japan's economy and currency play in the region.

Japan's main stock index also dropped 1.3 percent, and other Asian markets followed suit, reacting partly to events in Japan and partly to Friday's steep fall in U.S. stock prices. Hong Kong's main stock index tumbled 4.8 percent, Malaysia's slumped 4.1 percent, and South Korea's dropped 2.4 percent.

[In early trading Tuesday in Tokyo, the yen recovered some of its losses from yesterday after Japanese finance officials indicated they were considering new moves to intervene in currency markets. At midday the yen had risen to 144.81 to the dollar.]

The effort to reverse the yen's slide in June, which for a while knocked the dollar-yen rate back to around 133 yen per dollar, was motivated in large part by concern that Japan's troubles threatened to exacerbate the crisis afflicting its neighbors. The more Japan's economy and currency weaken, the harder it becomes for the rest of Asia to export, either to Japan or elsewhere. That is partly because Japan provides a major market for many Asian companies, and partly because those companies face tougher competition from cheaper Japanese products.

And now, the yen's renewed decline raises the same worries. Japanese Vice Finance Minister Koji Tanami acknowledged yesterday that "an excessive weakening of the yen is undesirable not only for our economy but also for the Asian and world economies." The U.S. Treasury, which played a key role in the June action, declined comment.

But analysts and traders said the yen would remain weak -- and might well drop considerably more -- amid deepening skepticism that the new Japanese government will make the drastic changes in economic policy needed to end the nation's seven years of stagnation, such as closing major banks burdened with bad loans.

"There's a good deal of doubt, and you'd have to go with Japan's track record on reform, which is one policy air-ball after another," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn.

Also driving the yen lower, experts said, was a recent spate of government reports showing that the Japanese economy was even more sluggish than expected. Contributing too was a comment late last week by newly appointed Finance Minister Kiichi Miyazawa, who suggested that he was disinclined to intervene in currency markets except "as an exceptional action."

Miyazawa's comments emboldened traders into concluding that they could sell yen and buy dollars without fear that government intervention would send the dollar back down.

"When the U.S. participated in intervention in June, we wanted something from Japan -- promises to act -- and it's not clear Japan will do the things it promised," said Marc Chandler, a senior currency strategist at Deutsche Bank Securities in New York. "Once their parliament passes some bills, then I could see the case for intervention. But not quite yet."