The rupiah has regained much of its strength, and interest rates have edged down from punishing levels. Yet the signs of initial recovery, while important, are largely an illusion. One reason the rupiah has strengthened, for example, is that borrowers have stopped trying to repay foreign loans, so demand for dollars, which would weaken the currency, is soft. Gnawing uncertainty over Indonesia's political future also is likely to scare off foreign capital for a long time. With the economy expected to shrink by 17 percent this year, the political situation is bound to get worse.
Japan remains the sick man of Asia.
Prices and profits are falling, while bankruptcies and unemployment are hitting record highs. When the history of the Asian crisis is written, hedge funds that have figured prominently in newspaper headlines may garner less attention than the quiet bleeding of Japanese banks. In the year that ended in June, Japanese banks cut lending in Asia by 32 percent. At home, Japanese banks have pumped up lending to sick real estate companies at the expense of small companies and manufacturers. At the least, Japan now has a war chest to battle a sudden collapse of the banking system that would have devastating global ramifications.