Global Markets Dive in Rebuff of Japan Strategy

WASHINGTON —  Financial markets around the world tumbled Tuesday in a vote of no confidence in Japan’s lackluster efforts to spur its economy out of recession, threatening to exacerbate the Asian economic slump and heighten its impact on other parts of the world as well.

The plunge began in the Japanese currency markets Tuesday morning--as the yen hit a new eight-year low against the dollar--and spread to the rest of Asia, Europe, Russia and Latin America before hitting U.S. financial markets early in the morning.

On Wall Street, the Dow Jones industrial average fell 112 points to close at 8,462.85, its lowest level since early March.

Although the U.S. market rallied from a loss of more than 250 points in the blue-chip Dow, the index’s decline left it 9.4% below its July 17 record high.

Tuesday’s global market losses posed a new--and potentially crucial--challenge for the Clinton administration, which has been struggling to limit the slump in Asia to prevent it from spilling over into Europe, Latin America and, eventually, the United States.

The White House said President Clinton, on a fund-raising trip in California, talked by telephone with Treasury Secretary Robert E. Rubin during the worst of the market crisis in mid-morning.

But officials hinted that no immediate action seemed likely and said Washington would continue to monitor the situation. Even as the yen fell past 147 to the dollar, the United States did not intervene in the foreign currency markets to help prop up the yen, as it did in mid-June, officials and private analysts said.

Early today in Tokyo the yen strengthened somewhat, to 146.02, as the government appeared to threaten to sell dollars to support the yen. “We will take appropriate action in the market as necessary,” said Haruhiko Kuroda, head of the international bureau of the Finance Ministry.

The situation is critical for the United States. A continued decline in the value of the yen could seriously worsen the 13-month-old Asian economic crisis, cutting off more export markets in Japan for other beleaguered Asian countries and making them less competitive against Japanese products.

It also could intensify pressure on China to devalue the yuan, which itself could have a domino effect that would spawn a new round of competitive devaluations in Asia.

China issued a statement Tuesday saying it would continue to maintain the value of the yuan, but economists say that the farther the yen falls, the harder it is for China to hold the line.

With China’s economy already slowing, its pledges to protect the yuan are based on the expectation that the United States will prop up the yen, Asia-based observers say.

Although few analysts yet believe the slump in Asia will set off a worldwide recession, economists note that the region’s downturn has already slowed economic growth around the world and has weakened the U.S. economic boom.

“I don’t think we’re talking about a global downturn, but I think it’s looking pretty bleak in Asia and in some other countries,” said Gregory B. Fager, Asian specialist at the Institute of International Finance, which monitors the world economy.

Others, however, were more pessimistic on Tuesday. “The financial risks are increasing rapidly worldwide,” said David Jones, economist at Aubrey Lanston & Co. in New York, a bond dealer. “What everyone has misjudged is how long and deep the Asian crisis would be.”

Robert Brusca, economist at Nikko Securities in New York, said the continuing plunge in many global stock markets reflected that “the risks are beginning to stack up” that a worldwide recession could be on the horizon.

The slump in world markets on Tuesday was alarming by any standard. Stock prices fell 1.4% in Tokyo, 3.6% in Hong Kong and 3.4% in Indonesia, then plummeted 2.8% in London and 2.4% in Paris. Mexico’s stock index fell 2.8%, while Russia’s plunged 9.1%.

Some East Asian stock markets now are at their lowest levels in five to 10 years, and show no sign of recovering.

Although the latest turmoil in financial markets was sparked by a policy crisis in Japan, the United States has been leading the global effort to manage the Asian economic slump, which is likely to be worsened by a further slide in the yen.

But analysts warned that Washington had few tools available to blunt the yen’s fall and calm the markets. They said the best hope for restoring stability would be a sign from Japan that it was ready to move faster to right its economy.

The United States last intervened in the foreign currency markets to help stem the yen’s slide on June 17, selling billions of U.S. dollars--at Clinton’s direction--to bid up the price of the yen and buy time for Japan to come up with a new plan.

The ploy--which took the financial markets by surprise--worked temporarily. But the yen began to edge down again after the new Japanese government declined to announce any new steps either to spur the economy out of its recession or to shore up its ailing banking system.

On Tuesday, the yen’s plunge broke through the level of 146.15 yen to the dollar that sparked June’s U.S. intervention. That, in turn, sent stock prices plummeting worldwide.

In addition to unilaterally intervening in the currency markets, the administration has other options:

* It could call a meeting of the Group of Seven--finance ministers and central bankers of the United States and its major trading partners--in a bid to persuade the other six to intervene jointly. But there has been little enthusiasm for that among U.S. allies.

* It could do nothing and hope that financial markets--which are especially volatile in August because so many participants are on vacation--quickly stabilize by themselves. Some analysts say that would help intensify pressure on Tokyo to take new measures on its own.

* It could try a softer, more cooperative approach, inviting Prime Minister Keizo Obuchi and Finance Minister Kiichi Miyazawa to Washington early for meetings with Clinton and Rubin--and using the sessions to appeal for action for the good of Asia.

* In theory, the Federal Reserve Board could cut U.S. interest rates to reduce the value of the dollar, but that, too, is considered unlikely. The central bank already fears that inflation pressures here are too intense.

Analysts point out that no matter which road the administration chooses, Japan is unlikely to act very soon. Under Japanese law, the earliest the Diet, or parliament, can approve the modest tax cut already proposed is December or January.

The proposed new spending programs and banking reform measures could be enacted more quickly, but Japan-watchers are pessimistic that the new government will be able to broker the compromises needed to push them through.

“The problem now really is the Obuchi government’s incapacity to move,” said Kevin G. Nealer, a strategist with the Scowcroft Group, which monitors geopolitical developments.

Tuesday’s slide in the markets came as some top policy-makers here were out of town. Clinton was in California on the last day of a fund-raising trip before returning to Washington today to deal with the embassy bombings in Africa.

While Rubin was in town, Lawrence H. Summers, his deputy, who has been the administration’s point man in the Asian crisis, was in New England on vacation. Timothy Geithner, the assistant secretary of the Treasury for international economic policy, was also on vacation.

The next several days will be critical for the administration. Although a gradual side in the value of the yen would be tolerable for a limited period of time, there is no doubt that a prolonged decline could have an adverse impact on the global economy.

“There simply aren’t a lot of good options here,” Fager said Tuesday.

Pine reported from Washington and Petruno from Los Angeles.

An audio analysis by Times senior markets editor Tom Petruno of world markets and the U.S. economy is on The Times’ Web site. Go to: http://161.35.110.226/markets

* STOCKS TUMBLE: Markets fall on deepening economic problems in Asia. D1

* YEN FALLS AGAIN: Japan’s yen drops to an 8-year low against the dollar. D1