CO-OPERATION in exchange rate policy has been one of the big successes of US-Japan relations since mid-1995 when the two governments launched a joint effort to strengthen the greenback and weaken the yen. In the last few days, however, signs have appeared that the consensus is breaking down. While Japan favours joint intervention with the US in foreign exchange markets to stem the yen's slide towards a five-year low of 130 yen to the dollar, the US is pressing Japan to stimulate its domestic economy so as to curb export growth and stabilise its resurgent current account surplus. American coolness to the idea of joint market intervention was a main factor in the dollar's 4 per cent jump in value against the yen last week. The dollar surged from a closing rate of 122.75 yen on April 3 to over 127 yen a week later, its highest level against the yen in nearly five years. Analysts said the rise directly reflected the unexpectedly soft line taken by US Treasury Secretary Robert Rubin at a meeting with Japanese Finance Minister Hiroshi Mitsuzuka on April 4. At the meeting Mr Rubin warned against a 'substantial increase' in Japan's foreign trade surplus - including the bilateral surplus with the US - but avoided any mention of the need for a dearer yen. Instead he called for stronger measures to boost domestic demand in Japan - something Prime Minister Ryutaro Hashimoto feels unwilling or unable to attempt. Mr Rubin's low profile on the exchange rate issue at the April 4 meeting encouraged dealers to buy dollars and sell yen, pushing the exchange rate through the 'psychological' barrier of 125, Mitsuru Saito, senior economist at Sanwa Bank, suggested. On Thursday, Finance Minister Mitsuzuka hinted that Japan might undertake 'reverse intervention' in the Tokyo forex market to push up the yen rate. But Mr Rubin later failed to endorse this idea. American caution on the intervention question reflects fears that a sudden reversal in the trend towards a strong dollar might stem the flow of Japanese funds into US government bonds. Japanese net purchases of US bonds surged from 1.41 trillion yen in 1995 to 4.94 trillion yen in 1996 as major institutional investors moved funds out of Japan to escape ultra-low interest rates. Sanwa Bank's Mr Saito believes, however, that life insurance companies are becoming wary of exchange rate risks and may reduce the rate at which they shift money out of Japanese securities. These fears could deepen if the US supports Japan in an attempt to curb or reverse the yen's slide against the dollar. On the other hand, the recent surge in Japan's foreign trade surplus, which most analysts see as a direct consequence of the cheap yen, could encourage protectionism in the US. Japan's fear about a cheap yen is that if the rate slips too far it could spark a counter-reaction in forex markets, leading to a repeat of the 1995 exchange market crisis when the yen hit a post-war peak of 79. 'Rather than face that prospect, the Bank of Japan and the Ministry of Finance would like to see the yen weaken gradually, perhaps to a range of 100-110 yen to the US dollar, an analyst suggested. Japan's massive foreign exchange reserves (US$217 billion at the end of January) mean it can afford to mount a major campaign against a strong dollar, says Makoto Miyazaki, manager of the funds and foreign exchange division at Bank of Tokyo-Mitsubishi. But it might take time to get results and, once the B O J intervenes against the dollar, it could prove hard to stop. What Japan cannot do is to try to strengthen the yen by tightening monetary policy. The financial problems facing Japanese banks are so serious that the B O J is likely to maintain its ultra-low policy stance at least until the end of the year. Low Japanese interest rates means that there is a gap of around 5 per cent between investment yields in Japan and those in the US. Disagreements between Japan and the US over how to handle exchange rate issues may be crucial at the next G7 meeting of developed countries' finance ministers on April 26. But it is not clear whether the meeting can set a new policy line unless Tokyo and Washington can first resolve differences on rates. For the time being the US appears hooked on the notion of a strong dollar. For Japan the dollar has moved far enough - if not too far. But its domestic economic problems mean that the only policy tool available to the government for correcting exchange-rate disparities is direct intervention in the markets.