On October 31, 1997, the IMF announced a rescue for Indonesia. Though it was Thailand who caught the Asian flu first, it was this latter country where a monetary line in the sand was drawn. Nobody wanted to find out what a complete wipeout of the Indonesia rupiah might mean for financial conditions across Asia. Included in that category of grave concern was, predictably, the Japanese.

Just a few days later, on November 3, Japanese broker Sanyo Securities went bust. Among Japan’s top ten securities outfits, it was the first of any serious size that had failed in that country going back to World War II. Given Japan’s struggles to come out of the aftermath of the eighties bubble collapse seven years earlier, this escalation in the Asian flu was judged particularly dangerous.

The same day Sanyo had its lights turned off, the Bank of Japan acting in concert with the Monetary Authority of Singapore announced further monetary measures on Indonesia’s behalf. Nowhere within them were yen or Singapore dollars. Both instead were actively selling US dollars (supplying) to buy Indonesia’s ailing rupiah. Sanyo’s exposure in this regard thus became quite obvious, as it wasn’t so much an Indonesia imbalance as overall “dollar” funding issue more generally spreading (contagion) across Asia.

Throughout November 1997, the Bank of Japan would commit about ¥39 billion in various arrangements including swap agreements in support of this early version of the global “dollar short.” They were ultimately unsuccessful, of course, as the Asian flu spiraled way out of control and took down what used to be called the Asian tigers. Japan then caught neck deep in the blowback sunk further into its lost decade – while being cruelly placed on the precipice for the start of a second one.

It’s somewhat of a mystery about whose dollars BoJ was selling in Indonesia (meaning in support of Japanese banks stuck with dollar liabilities tied to that country). There weren’t massive stockpiles of foreign reserves at that time, though BoJ did have access. I’ve often wondered if Japan’s central bank got itself into a bit of “dollar” trap by being so short after the operations, and then almost certainly being begged on a daily basis to do more.