YEN STRENGTH SURPRISES TRADERS, BUT THE RALLY COULD FADE QUICKLY

YEN STRENGTH SURPRISES TRADERS, BUT THE RALLY COULD FADE QUICKLY

The Japanese yen rallied late last week along with the Nikkei stock average on hopes that the Japanese authorities had finally recognized the seriousness of their economic problems.

Recognition that there is a problem is the first step toward a cure, analysts said, but time is short.''If they wait a couple of months to do anything, the yen will start slipping again,'' said Earl Johnson, foreign exchange economist at Bank of Montreal in Chicago.

''There is some optimism that the Japanese are finally getting their act together,'' Mr. Johnson said. ''We will have to wait and see.''

The yen's strength came from expectations that additional fiscal measures will be forthcoming and a general relaxation of tension in East Asia, said Marc Chandler, senior analyst at Deutsche Bank in New York.

The ruling Liberal Democratic Party appears poised to front-load public works spending in the first half of the new fiscal year beginning April 1, Mr. Chandler said.

It also may increase or extend the temporary tax cut proposed in mid-December.

Much depends on banks

In a move that will instantly recapitalize Japan's banks, they are expected to be allowed to revalue their real estate holdings to market prices.

This could boost the unrealized profit of the banking system by as much as $46 billion, Mr. Chandler said.

''Japan's banks have not been lending, and the economy will not recover until they do,'' Mr. Johnson said. ''Revaluing the real estate will help recapitalize the banks and increase their willingness to lend.''

The whirlwind tour through Asia last week by U.S. Deputy Treasury Secretary Lawrence Summers and a team of officials from the International Monetary Fund, including Managing Director Michel Camdessus, was another stabilizing influence on the markets, analysts said. But they warned that the turmoil in Asia will continue for months, if not years. Meanwhile, Japanese officials appear to have accepted that the economic data until the end of the current fiscal year will remain poor, Mr. Chandler said.

News that department store sales in Japan fell 6.2 percent at an annual rate in December after a 5.6 percent year-on-year fall in November failed to dent the more positive sentiment for the future, he said.

MID-DECEMBER LEVELS

Last week's strong advance propelled the yen to around 128 to the dollar, a level last seen in mid-December, when the Bank of Japan was intervening to support the yen with dollar sales.

It was interesting that the yen rose against European currencies as well, despite the fact that there was no joint intervention with the U.S. Federal Reserve. Only a week ago, the market was abuzz with talk that a joint effort was in the works to rescue the yen.

The renewed confidence in the Japanese currency is tentative at best. The rise in the South Korean stock market and currency last week contributed to the stabilization in Japan, said Bob Lynch, currency strategist at Paribas in New York.

FAR FROM OVER

''If Japan allows its banks to revalue their real estate, it would just be bookkeeping, but it would offset some of the problems the system will face when bad loans are recognized, if in fact it goes through,'' he said.

The troubles in Asia are not over yet, Mr. Johnson of Bank of Montreal said.

''It looks like Japan will have 1 percent growth this year if they are lucky,'' he said. ''The token steps they have taken so far are ridiculous. They need stronger stimulus,'' he said.

''And I am still skeptical about the situation in Indonesia,'' Mr. Johnson said. ''The Indonesian economy is extremely corrupt. It is one thing to pledge to do something and another thing to actually do it,'' he said.

Speculation that the Federal Reserve will ease monetary policy is premature, Mr. Johnson said.