Willingly or unwillingly, Japan will have to demonstrate its regional leadership by providing Thailand with a chunk of the US$20 billion (Bt580 billion) in loans it needs to maintain a positive cash flow and avoid a Mexico-style financial melt down. A helping hand would be in Japan's best interests as Thailand's bankruptcy would have an adverse regional affect on Malaysia, the Philippines, Indonesia and Singapore.

Already Malaysia and the Philippines, in particular, are fiercely defending their currencies, with foreign investors' fearing a rippling effect from the sharp baht depreciation after the Bank of Thailand abandoned its fixed currency regime on July 2. The domino effect could wreak havoc across the region in the absence of international aid.

When Mexico's financial crisis peaked in 1994, it immediately received a bail out package amounting to a combined $50 billion from the United States and the International Monetary Fund. The package saved the world from a financial calamity. As a big brother, the US could not afford to let its southern neighbour go under, a situation which would have severely affected American interests.

Likewise, Japan will have to act by coming to the rescue of Thailand, in particular, and Asean in general. Japan's stake in this region is sizeable, making it impossible for it to stay on the sidelines.

Last year, foreign direct investment by Japanese companies in Asia reached 24.2 per cent of their global investment, of which Thailand accounted for 2.9 per cent, Indonesia 5 per cent, Singapore 2.3 per cent, Malaysia 1.2 per cent and the Philippines 1.2 per cent, according to Japan External Trade Organisation (Jetro). Altogether, Asean received direct investment from Japan totalling ¥682.1 billion (Bt170 billion).

Last year alone Japanese companies committed to invest Bt87.3 billion in Thailand, according to unofficial figures provided by the Japan Chamber of Commerce. Between January and June, Japanese companies committed another Bt42 billion. With this huge stake in Thailand and the region, it comes as no surprise that not a single Japanese bank participated in the fierce speculative attacks against the baht in mid-May.

Japanese Prime Minister Ryutaro Hashimoto said before he attended the G-7 summit last year that he would represent the voice of Asia at the world economic superpower forum. That voice will be put to a big test between July 16 and 20, when top Japanese financial officials will be holding talks with Finance Minister Thanong Bidaya and Foreign Minister Prachuab Chaiyasan in Tokyo about the possibility of a loan package to assist Thailand.

The bail out package is crucial for it will help to stop internal bleeding in the economy, which is suffering from the deteriorating asset quality of banks, tight liquidity, high interest rates and capital outflow. Without fresh capital from abroad, it will be extremely difficult for the central bank to defend the currency.

Hitoshi Komasaka, the general manager of Sanwa Bank Ltd (BIBF), said Japanese companies investing in Thailand will be able to muddle through a 10 to 15 per cent baht depreciation. ''But if the depreciation reaches 20 per cent or more, it will be disastrous for Thailand," he added.

''Japanese companies are adopting a wait-and-see attitude. What they're most interested in seeing is a package of measures by the government for dealing with the economic problems," Komasaka said. ''But overall, we still have confidence in Thailand and believe that five years from now it is going to be a strong country."

Other analysts said Japan's economic relations with Thailand will become more crucial in the future as the central bank looks for the opportunity to return to a fixed exchange regime, which will carry a heavier yen weighting than the previous system. The managed float currency system is not suitable for Thailand during this period of financial turmoil.

One analyst said a basket of currencies with heavier yen weightings, accompanied by a widening trading band, would be more appropriate for the developing economy.

Thailand's woes will be prompting Thai and other Asean policy-planners to rethink the regional formula for economic success. Over the past decade, the economic success of Thailand and other Asean countries could be attributed to their strong domestic fundamentals in combination with their willingness to embrace external trade and capital inflow, according to a paper written by Flemming Larsen and Jahangir Aziz, the IMF economists.

Another crucial ingredient is their participation in global markets and global financial systems, which allowed them to increase economic efficiency and productivity growth, the IMF economists added.

These regional economies have heavily depended on capital inflows to finance their current account deficits and economic growth. If interest rates in the developed countries were to rise, the party would be over.

In the case of Thailand, which has over-invested and mis-allocated resources, its current account deficit has proved unsustainable. It is the first Southeast Asian country to have flunked its Tiger status test.