US FINANCIAL markets have fallen heavily after a clear warning from the Japanese Prime Minister that the dollar must be kept stable to avoid a massive sale of US assets by Japanese investors.
The Dow Jones index fell by 192.25 points, a drop of almost 2.5 per cent, in a dramatic late sell off of shares, which is sure to result in European markets opening lower 1 this morning.
It was the biggest fall in points in the Dow Jones index since Black Monday in October 1987 - when it collapsed by over 500 points. But because the index has grown so much in the meantime, the decline was not as significant in terms of the percentage loss in share values.
Speaking at a reception in Columbia University in the US late yesterday, the Prime Minister, Mr Ryutaro Hashimoto, warned that Japanese investors would sell US Treasury bonds (T Bonds) if the dollar were not kept stable on the markets - a clear warning to the Clinton administration not to seek a weaker dollar to try to boost US exports.
"If the T Bonds were sold en masse, the US economy would have to absorb it and the effect could be significant," he said.
"I hope the US will be attached to maintaining exchange stability and that we won't have to sell these T bonds," he added in a veiled threat against the United States not to use its exchange rates to correct trade imbalances between Washington and Tokyo.
The US trade deficit with Japan hit $4.84 billion (£3.2 billion) in April, up from $4.47 billion the previous month, and marked the worst trade results since October 1996.
The speech rattled the stockmarket, which was already weak due to profit taking after a bull run which had resulted in the Dow Jones finishing at a new record high last week. Fears of higher interest rates and investors taking profits say share price falling steadily yesterday.
News of Mr Hashimoto's comments made investors even more nervous than they had been lately and lead to a sharp late fall off in shares.
The move also hit the US TBond market, where long term interest rates rose from 6.66 per cent to 6.70 per cent and also left the dollar a pfennig weaker at DM1.7187 against the deutschmark in New York last night.
Close attention will now be paid to see if there is any reaction from the US to Mr Hashimoto's comments.
The Japanese Prime Minister said that Japan should not be penalised for investing in the United States.
"Two out of three Japanese cars we see on a US road are produced in the United States," he noted, adding that Japan's rate was "extremely high" at 3.4 per cent.
The Prime Minister said Japan welcomed US investment, which would help bring down the jobless rate. "Those of you who want to invest in Japan will be appreciated. Japan's economy will be strengthened," Mr Hashimoto said.
