Financial troubles in far-away places like Japan used to be of little import to the United States. No more.
Stock and bond prices in New York are now correlated in a degree to the relationship between the yen and the dollar. When the yen is strong on the foreign exchange markets, the indexes go up; when the yen is weak, prices often take a plunge.
That's because Wall Street investors see the dollar/yen rate as a barometer of the gravity of the financial crisis in Asia and the prospects for a turnaround in Japan's economy.
Japan has the second-largest economy in the world - eight times the size of China's economy, half that of the US economy. It generates a third of world savings. Some of that money flows into the US, pushing up bond prices.
The outlook for government action In Japan to deal with the nation's banking weakness has improved. There's talk in Tokyo of immediate steps. This would be politically brave, since an election in the upper house of parliament takes place July 12.
In any case, stock prices rose in both Tokyo and New York.
Japan's ruling Liberal Democratic Party is considering formation of a "bridge bank" with some $211 billion in government money to take over loans of failed financial institutions. Surviving banks would be in better shape to make business loans needed to lift Japan out of its slump.
There are still quibbles over details. Hard decisions aren't always easy in a nation where consensus-building is prized.
A fire was put under policy discussions when Long Term Credit Bank, a Japanese institution beset by bad loans, and Sumitomo Trust & Banking Co., Japan's second-largest trust bank, announced plans June 26 for a merger. Taxpayer money will be needed to clean up bad loans, bank officials say.
We welcome Japan's efforts to fix up its financial system. We also approve of the $4 billion cooperative intervention by the US Federal Reserve and the Bank of Japan in the foreign exchange markets June 17 to stem a serious slide in the yen's value.
Since then, the dollar has moved back toward its level before the intervention. Nonetheless, the action gave Japan's policymakers extra time to get their act in better shape.
This tactic also encouraged China not to devalue its currency. Chinese officials gave US Treasury Secretary Robert Rubin fresh assurances on this just before his boss, President Clinton, met with President Jiang Zemin in Beijing.
So far so good. A worsening of the Asian crisis has been averted. Hope is rising that Japan will rescue its banks and pass tax cuts and other measures to reinvigorate its limp economy.