| BUSINESSWEEK ONLINE : DECEMBER 13, 1999 ISSUE | ||||||||
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| INTERNATIONAL BUSINESS
Will the Yen's Surge Do Japan In? Its swift ascent will hurt exports and could choke off growth On the face of it, you might think global investors ought to be wary of Japan. The country has a feeble recovery, a banking system that's rotten to the core, weak profits from its debt-laden companies, and minimal interest rates. Yet since July the yen has soared at a 4% compounded rate every month, reaching a four-year high of 102 to the dollar and an all-time peak against the euro. So what's up? As always, Japan's low levels of imports continue to stoke its chronic trade surplus. Despite weaker exports and higher oil prices, the surplus is still a monster $150 billion a year, or 3% of gross domestic product. That, in turn, keeps its banks and companies gorged on dollars, euros, Thai baht, and the like. But instead of recycling the money through overseas investments and loans, they are keeping it at home to bolster sagging balance sheets. Worse yet, they're getting rid of foreign assets--such as the Tiffany & Co. building in New York, which Daiichi Real Estate recently sold for about $100 million--and then dumping the dollars to buy yen. Banks, staggering under $600 billion of bad debt, are calling in loans to foreigners. Money-center banks have slashed lending to the rest of Asia by 40%, to $74 billion, since 1997, adding to upward pressure on the yen. Meantime, Japan's institutional investors are weakening the dollar by shifting money out of U.S. stocks and bonds and into Europe. Global fund managers are stoking the fires, too. They have poured $8 billion a month into Japanese stocks this year, fearing that the world's second-biggest economy is a can't-miss restructuring play. That has been a winning bet: In dollar terms, the Nikkei is up 48% so far this year, while small high-tech companies have soared 250%. Besides, with some local assets up for sale to foreigners, Japan is in the grip of a cross-border merger boom. On Nov. 29, French insurer Axa announced a $2 billion takeover of ailing Nippon Dantai Life Insurance Co. Indeed, foreign direct-investment deals totaled $10 billion in the first half of this year, compared with $4 billion for all of 1998. ''Behind the surge is industrial reorganization on a global scale'' in Japan, says Bank of Japan Deputy Governor Sakuya Fujiwara. PRESSURE. Yet the strong yen has risks: It could crush export earnings--and Japan's two-quarter rebound from recession. Jardine Fleming Securities estimates the yen's rise cost Japan's auto makers about $4.2 billion in operating earnings in the first half of this year. If the yen gets locked in a trading range of 90 to the buck, Industrial Bank of Japan Ltd. figures it would shave 0.34% from an economy that will be lucky to grow 1% in the next year. A lurch to, say, 80 to the dollar might push the economy back below the water line. So the pressure is on both Finance Minister Kiichi Miyazawa and Bank of Japan Governor Masaru Hayami to pull out all the stops to avoid a reprise of yen-induced downturns that cut short Japan's recoveries in both 1993 and 1995. With much of Japan's economy on government life support, ''it can't afford another shock,'' figures Hiroshi Kuri-bayashi, an economist with Barclays Capital Japan Ltd. Dodging the bullets this time won't be easy. Already, the Bank of Japan has spent over $40 billion in currency interventions since the summer to weaken the yen by selling it--to little avail. And though Miyazawa has hinted that Japanese, U.S., and European authorities may team up to rein in the yen, as they did in late 1995, Treasury Secretary Lawrence H. Summers' relaxed attitude toward the latest currency shift suggests otherwise. Meanwhile, Hayami--despite a few ambivalent statements now and then--has set his face against easing monetary policy radically. PRINT MONEY? A growing band of analysts thinks Hayami should step on the gas. Some want the central bank to intervene in the currency market more dramatically. So far its efforts have had little impact on money supply or the yen-dollar relationship. That's because the bank regularly mops up from the money market the yen it puts in circulation by selling dollars. Still others want him to turn on the printing press and push Japan's money supply growth into double-digits, from about 6% now. But Hayami thinks that the mighty yen keeps intense pressure on Japanese companies to restructure--and helps the recovery in East Asia by creating a market for their exports. To be sure, Japan's drive to fix its crippled financial sector, rev up its Internet economy, and close excess capacity in sunset industries will eventually help the global economy. The danger is that in the meantime it risks destabilizing the system completely. And if Japan genuinely wants a permanent solution to its yen dilemma, it needs to become an import superpower. When exports are the only game in town, currency gyrations can be a killer, especially when global investors hold the yen in an ardent embrace. Japan, as ever, needs a better balance between domestic-led consumption and growth and selling its wares abroad. By Brian Bremner in Tokyo _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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