That international markets respond to political will is well illustrated in this week's surprise intervention by United States and Japanese authorities in support of the rapidly sinking yen. Their action was provoked by increasingly grave Chinese warnings that its currency's value against the dollar could not hold if the yen continued its slide and that this would probably lead to a wave of competitive devaluations throughout the Asian region feeding back rapidly to hit the US and therefore the world economy.
As many commentators have pointed out, such intervention only buys time and cannot be a substitute for structural reform in the Japanese economy. But it was taken just at the point where political leaders in Washington, Tokyo and Beijing realised that if left untended, the yen's collapsing value would have dangerous consequences. Japan, it must be remembered, is the world's second largest economy. It faces several major problems, pithily summarised yesterday by the prime minister, Mr Hashimoto, who pledged his government will "write off bad loans, achieve growth in domestic demand, open Japanese markets further and promote deregulation". A chorus of approval greeted his commitment, which matches the conventional wisdom among international policy-makers on what needs to be done to restore confidence.
Mr Hashimoto's government has been slow to move because it has been mesmerised, even immobilised, by accumulating evidence of recession, confirmed in last week's negative growth figures. It is not an auspicious time to reconstruct the country's financial and banking system so as to tackle the huge overhang of debt arising from the collapse of the 1980s bubble economy. It is estimated that some 750 billion US dollars of bad debt is concealed in the banking system. The classic requirement is for the government to protect creditors and depositors as it engineers the closure of banks carrying these doubtful loans, if necessary by taking them into temporary ownership. This is complicated in Japan by the interlocking corporate system in industry and finance.
Mr Hashimoto's other reform undertakings - to open Japanese markets further and promote deregulation in the economy - will require orchestration of a high order, in a way that is highly uncharacteristic of the Japanese political system, which functions usually by consensus and makes haste slowly. Many critics say, indeed, that it is incapable of rapid action on such a broad front, however necessary it is shown to be. The conventional wisdom insists that the economy will have to be stimulated through a decisive growth in domestic demand if the potential deflationary effects of financial and economic restructuring are to be avoided. Hence the calls for radical tax cuts to boost demand. It has been highly significant in this crisis that China has taken such a leading role by calling on the US and Japanese leaders to co-ordinate action and protect the Asian region from further currency devaluations. Such political pressure will be an essential component of the forthcoming negotiations and a clear focus for President Clinton's visit to China next week.