International -- Intl' Business: JAPAN

A BOLD CAMPAIGN TO END ENDAKA (int'l edition)

If anyone deserves celebrity status in the global currency markets these days, it's probably Eisuke Sakakibara. The head of international operations for Japan's Finance Ministry, Sakakibara is a brash economic nationalist who strongly supports Japan's interventionist brand of capitalism. Now, he's using his considerable clout in international financial circles to shake up the Finance Ministry and pull the Japanese economy out of its four-year slump.

Sakakibara's goal is simple yet daunting: Encourage trillion-dollar-a-day currency traders to buy dollars and sell yen, driving down the latter's value. By hobbling the Japanese export machine, the high yen has aggravated Japan's deflationary spiral and pushed the country nearly into recession. So a more stable yen is critical to economic growth (chart). To help achieve it, Sakakibara has been consulting regularly with U.S. Deputy Treasury Secretary Lawrence H. Summers and coordinating interventions in the currency markets by central banks. Back at home, under his stewardship, the Finance Ministry in early August surprised the markets by lifting curbs on life insurers' foreign-currency investments and loans.

So far, Sakakibara's plan is working. By Aug. 16, the greenback had soared to 98 yen, 24% above its 1995 low of 79 on Apr. 19. The dollar's turnaround might take a bite out of U.S. exporters' profits (page 14), but it's the kind of medicine Japan's ailing economy needs. The superyen "was consigning Japan to quasi-stagnation," says Russell Jones, Lehman Brothers Inc.'s chief economist in Tokyo.

Of course, Sakakibara had plenty of help. Well before he executed his game plan, the markets were primed for an about-face (table). Odds had improved that Washington would slash its dollar-weakening budget deficit. Also, Washington was becoming more conciliatory about trade--and worried about Japan's economy. Perhaps most critical has been a shift in Administration policy, which had favored a soft dollar to pry open Japanese markets. Now, with a Presidential election coming, the White House wants a stronger dollar to cut interest rates, spur the economy, and shrink Japan's politically sensitive trade surplus.

Sakakibara sensed--and exploited--the change in direction. "There is a widespread perception that the U.S., for strategic reasons, wants a stronger yen," he says. "It's wrong." Traders who bet against Sakakibara are reeling.

HAPPIER CARMAKERS. The prospect of a weaker yen has boosted the earnings outlook of Japan's flagship auto and consumer electronics exporters. Every one-yen fall against the dollar generates an extra $300 million in pretax profits for Japan's top five auto makers, reckons Lehman Brothers auto analyst Koji Endo. If the 20% yen depreciation holds for six months, Japanese corporate profits overall could rise 12% to 24% in 1996, adds Jesper Koll, an economist at J.P. Morgan Securities Inc.

And the bulls are charging back into the stock market. The Nikkei average soared 706 points, to 18,158, on Aug. 16, up 27% from its low of 14,295 on July 3. While the benchmark is still off 6% on the year, more than $14 billion in foreign money has rolled into Tokyo stocks since January.

Salomon Brothers Inc. economist Robert A. Feldman sees the weaker yen propelling Japanese growth to a respectable 2.8% in fiscal 1996 if the Bank of Japan keeps monetary policy loose and the government kicks in with an expected $106 billion spending package in the fall. A lower yen should open the wallets of anxious Japanese consumers, whose spending represents about 60% of the nation's economic output. As the yen soared, Japanese companies slashed costs, crimped wages, and hinted at broad layoffs. So consumers held on to their yen, battering retail sales all year.

Although the troubles ailing Japanese lenders, saddled with up to $800 billion in bad or questionable loans, will take years to work through, a softer yen will give them breathing room. The stunning rebound in the Nikkei is lifting the value of stock portfolios of banks and insurance companies, giving them greater flexibility in managing their bad debts.

Sakakibara's blueprint could spur the economy even more if it pounds the yen further. For example, rule changes announced on Aug. 2 gave life insurers an incentive to recycle more of their $18 trillion in assets into foreign-denominated bonds. That would drive the yen down and aid Japanese exports.

LOCKED IN. But it's not certain that institutional investors will buy. Life insurers are squeezed by policies guaranteeing 4.5% returns when their own investments at home are generating 2% to 3%. Also, many got burned as a soaring yen wrung the value out of their dollar-denominated investments in the past two years. Small wonder the companies were bit players in the just-completed auction of $40 billion in U.S. Treasury bonds and notes.

Their comfort level might rise if Sakakibara starts raiding Japan's public savings pool to bankroll a Treasury bond buying spree. The Finance Ministry's yen-cooling package promotes foreign bond purchases by such institutions as the ministry's trust fund bureau. It controls $4 trillion in assets, of which less than 1% is invested in bonds overseas. And the agency may tap other war chests. Morgan Stanley & Co. economist Mineko Sasaki-Smith says if the funds invested 10% of their money in foreign bonds, yen sales to buy the bonds would push the dollar up enough to lure life insurers into the markets.

The insurers may still balk, however. Falling property prices are still battering balance sheets. Also, says Keisuke Iwasaki, a senior economist with Sanwa Research Institute, the insurers' "hidden stock reserves have already been diminished" by the Nikkei's free fall earlier this year. Bottom line: It may be years before insurers venture outside of Japan in a big way.

The downside of the dollar rally is that it takes pressure off Tokyo to make needed structural changes in the economy. With the dollar rising and Japan's global trade surplus down 23% in July, calls for further opening of Fortress Japan may diminish. As a result, Prime Minister Tomiichi Murayama's coalition government may fail to champion the kind of broad deregulation that would open up Japan's fortress economy. Over the long run, only fundamental economic reforms can return the country to the good old days of 4%-plus annual growth. Says J.P. Morgan's Koll: "Japan continues to be a high-cost producer with excessive employment and a fragile financial sector."

For now, though, Sakakibara has orchestrated a remarkable turnaround in the market and helped polish his ministry's do-nothing image. Intense dollar-buying by Japanese trust banks, American hedge funds, and Asian central banks seems sure to keep the dollar moving upward in coming weeks. If so, Sakakibara's rescue scheme may give the Japanese economy the shot it needs to emerge from the quagmire.

TURNING THE DOLLAR HAWKS INTO DOVES

JUNE 15-17

At the G-7 summit in Halifax, world finance ministers call for an "orderly reversal" of the dollar's decline

JUNE 28

After months of threatening an all-out trade war, American and Japanese negotiators resolve their dispute over auto parts

JULY

Frequent contact between Japanese Finance Ministry officials and their counterparts in Washington suggests a new degree of cooperation in managing exchange rates

JULY 31

A run on Cosmo Credit Corp. sparks international fears of a major banking crisis in Japan and spurs Tokyo to take action

AUG. 2

The Finance Ministry loosens restrictions on foreign-currency investment by life insurers

AUG. 15

Massive intervention by the Japanese, U.S., and major European central banks helps push the dollar to its highest level in six months

DATA: BUSINESS WEEKBy Brian Bremner in Tokyo, with Dean Foust in Washington

• Tweet
• Facebook
• LinkedIn
• Google Plus
• Comments
• Email
• Print