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WHY THE SOARING YEN WON'T SHRINK JAPAN'S TRADE SURPLUS
President Clinton wastes few words when it comes to measures to curb Japan's $49 billion trade surplus with the U. S. At an Apr. 16 White House press conference with Prime Minister Kiichi Miyazawa, Clinton said he would like to try "three or four" new strategies. "No. 1," he said, is "the appreciation of the Japanese yen."
With the President seconding what Treasury Secretary Lloyd M. Bentsen already had been recommending for weeks, traders have driven the yen to record highs against the greenback (chart). That has prompted Japanese Finance Minister Yoshiro Hayashi and other officials to all but beg the Group of Seven industrialized countries to intervene before the soaring currency puts an end to Japan's fledgling economic recovery.
But those fears may be overblown. While such Japanese export industries as automobiles and electronics are already meeting stiff price resistance overseas, other industries will benefit mightily as the yen's rise slashes the cost of importing raw materials. The global influx of cash into the yen may even allow the Bank of Japan to lower interest rates. And that will certainly give Miyazawa's $117 billion economic-stimulus plan an extra boost. "For the nation as a whole, it isn't a major blow," says Hideki Furuya, a senior economist at Sanwa Research Institute, who figures the yen's 18% rise in the last year, to 110 to the dollar, will shave only two-tenths of a percent off this year's 2.5% economic growth.
CRIES OF PAIN. Many economists are skeptical about Clinton's bet that a higher yen will curb the trade deficit. They say the strong currency will spur Japanese companies to even greater efficiency and induce them to build more plants overseas to cut manufacturing costs. And even if they don't, companies in businesses such as chip-etching and broadcast equipment that are dominated by the Japanese are in a strong position. It won't be hard for them to hike their export prices to cover exchange rate changes. A high yen will also raise the cost of investing in Japan, which will make it even tougher for American companies to penetrate the country's tricky market. In the short run, the deficit could soar as the dollar value of Japanese goods rises. Robert A. Brusca, chief economist of Nikko Securities International Inc., points out that halving the dollar's value against the yen since 1985 has had little effect on trade flows. "So why will this next move be so important?" he asks.
That's not to say there won't be pain in Japan. Carmakers, such as Toyota Motor Corp. and Nissan Motor Co., currently face a shrinking market share in America, and they must endure wrenching restructuring. And Compaq and Dell are closing in on Japanese computer makers such as NEC on their home turf.
But Japanese companies have other options than manufacturing in high-cost Japan. Despite the recession, they have been investing $6 billion a year in Asian countries, such as Thailand, Malaysia, and Singapore, building facilities for making automobiles and numerous electronic components. This provides the Japanese with an alternative base that is less affected by the yen's fluctuations. The strong yen makes it cheaper to invest in Asia, where many currencies track the dollar.
The Japanese also have adjusted their export patterns to ease their dependence on the U. S. Japanese exports to East Asia, for example, are running at around $10 billion a month, more than the $9 billion a month that goes to the U. S. That's a smart game plan, given that Asian markets offer hotter growth than the recession-plagued markets of Canada and Europe, where U. S. exporters have focused their efforts.
SEA CHANGE. Even for those companies still relying exclusively on manufacturing at home, a higher yen can be good news. Nippon Paper Industries Co., which buys wood chips from the U. S., figures that each one-yen drop in the dollar boosts its profits by about $3 million. A similar drop will bring Tokyo Electric Power Co., a big consumer of imported oil, a $36 million yearly profit windfall. And Nippon Steel Corp., a big exporter, won't be hurt much, because its coal and ore imports about match its steel exports in value.
There's no doubt that the rising yen has been a huge boon for Japan's troubled financial industry. Last year, Japan's banks feared they wouldn't meet the stringent capital rules set by the Bank for International Settlements for 1993. But there has been a sea change. First, the recovery of the stock market boosted the value of the banks' securities holdings and increased their capital. Now, the rising yen is further strengthening their balance sheets.
The value of the banks' huge foreign loans--estimated at $920 billion in September--has plummeted in yen terms because they were largely denominated in dollars. That will free capital and give them leeway to step up lending at home. Some Japanese bankers think that every one-yen rise might free as much as $40 million in capital at each of the biggest banks.
It may be that of all the different measures that President Clinton is considering to redress trade imbalances with Japan, devaluation of the dollar is probably the easiest one for the Japanese to accommodate.
No wonder Japanese policy makers appear to be resigned to a higher yen, despite the protests from Corporate Japan. It's something they know they can live with.Larry Holyoke in Tokyo, with Stanley Reed in New York