Global economy 'as strong as ever'

Paulson's trip to Tokyo, the first leg of a three-nation Asian tour, comes amid turmoil in global stock markets and a sudden plunge of the US dollar against the yen.

Asian shares in particular have plunged over the past week amid worries about overheated share prices and a global slowdown, although many regional markets recovered, showing that investors had regained a measure of confidence.

Paulson tried to quell market concerns, saying the US and global economy are strong and stock market volatility is inevitable.

"The global economy is more than sound. It's as strong as I've seen in my business lifetime," Paulson said after meeting Japanese officials in Tokyo.

"Markets very seldom move in a straight line," said Paulson, who was scheduled to later head to South Korea and then China. "You are always going to have volatility."

Paulson also said that economic reforms in China, the epicentre of the recent meltdown, would help lessen such ups and downs. A nine per cent plunge in the Shanghai stock index last Tuesday was the catalyst for the selloff in global markets, including Wall Street.

Many Asian markets bounced back, with Tokyo's Nikkei 225 index rising 1.2 per cent and Hong Kong's Hang Seng index rallying 1.6 per cent.

The US dollar also recovered after tumbling to 115.47 yen on Monday, its lowest since December 8, from above 120 yen a week ago. On Tuesday, it was trading at 116.37 yen.

Paulson and Japanese Finance Minister Koji Omi agreed that there was no need to be concerned about the recent market volatility and that markets mechanisms were functioning well, Omi told reporters after their dinner meeting.

Both men also concurred that exchanges rates should be left to the market, he said.

Paulson applauded Japan's effort to reform the labour market as important to sustaining growth and said he welcomed Prime Minister Shinzo Abe's efforts in this area.

Later in the day, Paulson was expected to meet Bank of Japan Governor Toshihiko Fukui, who recently shepherded the central bank's second interest rate hike since last year, a quarter-point increase to 0.5 per cent.

China's huge trade gap with the United States will likely be a focus of talks in Beijing. The US trade deficit with China hit a record $US232.5 billion ($A302.1 billion) last year, prompting more calls by Democrats in the US Congress for the Bush administration to do more to deal with the soaring imbalance.

American politicians are also pressuring China to free up controls on the movement of its currency, the yuan.

Critics in Washington say the yuan is artificially undervalued against the dollar and that the difference gives Chinese exports an unfair advantage on the world market.

While in Tokyo, Paulson told Japanese officials that Washington has three main objectives in dialogue with China - opening the service sector to foreign investment, strengthening Chinese environmental protection and accelerating the overall speed of Chinese economic reform.