Japanese bonds, currency and equities fell sharply yesterday, dragging down other world markets in their wake. The yen weakened further against the dollar after Mr Robert Rubin, the US Treasury secretary, said the economic situation in Japan was extremely troubling.
"We are greatly concerned about the weakness of the yen. But the ultimate answer lies in the Japanese economy," he said.
The markets interpreted his comments - in testimony to the US Senate finance committee - as a sign that the US was ruling out concerted foreign exchange intervention. Mr Rubin later said intervention is "always a tool that's available".
In New York last night, nervousness about the situation in Japan and the consequences for Asia led to a sharp fall in share prices. Fuelled by fears that these factors could hit corporate profits - or even slow international economic growth - the Dow Jones Index lost 159.93 points to 8,811.77, a drop of 1.78 per cent. It was the second largest drop in US stock prices this year and the worst performance since the Dow lost 222 points on January 9th. European markets also suffered yesterday and will open nervously this morning in the wake of Wall Street's fall. London dropped yesterday by 2.25 per cent, its second sharpest fall this year. Shares in Paris fell 1.59 per cent, although Dublin was quieter, with the market down just 0.31 per cent in light trading.
AIB, Bank of Ireland and Irish Life, together with the leading industrial stocks, CRH and Smurfit, were the main losers in Dublin. However, it was the second fall in two days in Dublin and analysts expect greater volume selling today, prompted by inflationary fears and jittery international markets. Meanwhile, nervousness about Japan sent the dollar to Y144.35 in New York last night, its highest level in eight years. The belief that this means that US interest rates cannot increase, the strength of the dollar and warnings about the impact for the world economy sent a surge of funds into the US bond market. This sent prices soaring and meant that US long-term bond yields - or longterm interest rates - fell to their lowest recorded level at 5.65 per cent.
The slump in Japanese markets fuelled fears that foreign investors were selling Japanese assets of all three classes - a "triple-sell" that could hasten the fall in value of the yen and exacerbate the Asian economic crisis.
Ms Philippa Malmgrem, foreign exchange strategist at Bankers Trust, said: "I think the dollar could go to Y160 or Y180 in the not-too-distant future. This is being driven by capital outflows and the government's non-policy towards the yen."
Excessive falls of the yen could trigger a second crisis in Asia that could lead to a global depression, warned, Mr Supachai Panitchpakdi, Thailand's deputy prime minister.
The dire state of Japanese domestic demand was underlined by April's private machinery orders data, which showed a 16.8 per cent year-on-year fall to the lowest level since May 1994.
Gross domestic product data for the first quarter are scheduled to be announced today. They are expected to show a decline of 2.5 per cent, confirming that Japan is technically in recession, defined as two consecutive quarters of negative GDP growth. The disappointing economic data, concerns about the banking system and worries about the Asian slowdown's effect on the Japanese economy were behind yesterday's falls in the equities, currency and bond markets.
The banking sector dropped to a decade low, dragging the benchmark Nikkei 225 average down more than 2 per cent to 15,014.
Ms Alicia Ogawa, chief equity strategist at Salomon Smith Barney, said: "Until now people have been saying Japan is a rich country and so it could not hit the wall - but maybe that day is coming."
Fears that the ruling Liberal Democratic party could issue large quantities of bonds hit government bond prices.
The latest yen fall exacerbated talk of a Chinese yuan or Hong Kong dollar devaluation, despite more official statements that the currencies' values would be preserved. Hong Kong chief secretary, Mr Anson Chan, speaking in Washington, told reporters that Hong Kong did not contemplate moving away from the Hong Kong dollar - US dollar link and China has also said that it intends to maintain the yuan's link to the US currency.
Investors now fear that the weakness of the yen could set off a further fall in a range of Asian currencies and, after IMF rescue plans had restored some confidence in investments in the region, investors confidence has now been shaken once again.
