Tectonic plates are grinding under the solid ground of the world economy. Danger looms when top industrialists warn of global depression, the yen falls to a 6.5-year low and the world's biggest surplus nation sees its debt downgraded. Once again, Japan is sending shudders through world markets. We are almost inured to a Japanese economy lurching from crisis to crisis. We comfort ourselves that Japan is rich enough to avert disaster. Sooner or later reform will happen, but on its own terms and pace - even the US Government seems to have given up forcing radical change. All well and good, but how do you 'contain' the world's second-largest economy? A prolonged weakening of the yen would export economic chaos far beyond Japan. While the US goldilocks economy got new legs from a flood of cheap Asian imports, it cannot play importer of last resort forever. Deflation remains the ultimate demon. Yesterday, the yen fell through 135 to the dollar as recession fears mounted. Japanese savers are becoming increasingly free to invest outside of Japan; the big worry is if enough of them take flight from puny interest rates and a currency in which they have lost confidence. We are at the top end of most economists' near-term forecasts for the yen. Should it continue to fall we are entering unknown territory. Asia will feel the heat with Japanese trade and investment pivotal to recovery. Forced into a competitive devaluation spiral, last year's chaos could easily be repeated. Rest assured Asian currency traders won't be shy in enforcing economic reality. Beijing is known to view the yuan-yen rate as its key target. Should a super-competitive Japan emerge, Premier Zhu Rongji could yet turn tail on earlier promises not to devalue. Should that happen . . . well, who knows, it definitely won't be pretty. That is the standard 'Asia exports the final crisis of capitalism' monologue keeping bankers awake at night. It has a rigorous logic and most of them seem to be crossing their fingers and hoping the average Japanese buys another stereo and keeps her savings at home. Rather, like Mexico's reliance on its northern neighbour, common sense dictates Asia needs a strong, or at least functional, Japan to recover. An intriguing diversion from this orthodoxy comes from Merrill Lynch. Surprisingly, it argues a weak yen and enfeebled Japan might help an Asian recovery. Confused? Merrill reckons Asian currencies can avoid the envisaged spiral of decline. Economic shock means shrunken consumption and monetary growth, bringing current accounts into surplus. In short, Thailand, Malaysia and others no longer rely on Japanese investment and lending. What Asia needs is not fresh money, but deals to convert pressing short-term obligations to longer tenures. Recovery in Japan might hinder this process as banks there pull the plug, preferring to chase profitable domestic lending, Merrill argues. The trouble with this is it ignores a key fact in why Asian trade accounts have recovered. Not only has consumption collapsed, killing imports, but exporters got a boost from currency devaluations. Japan remains a giant market for those exporters and a dramatically weaker yen must hurt. What is more, Japanese multinationals running downstream manufacturing are likely to close and dust down mothballed plants back home. All of this, of course, assumes the rest of the world sees no substantial fallout from a much weaker yen and Southeast Asia exists in splendid isolation. The harsh reality is that market rebounds have been driven by plentiful liquidity conditions causing surplus foreign investors to seek opportunities in an Asian rebound. All indications are that their commitment remains conditional. Japanese policy-makers retain significant capacity to coerce firms into keeping their currency onshore. US silence on a weakening yen should not be mistaken for disinterest. Should it go into an even sharper decline expect concerted help because we will be facing more than a little local disturbance.