White House goal is cut in trade gap

STRONG YEN SPURS HOPES, FEARS

June 17, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- For months, Clinton administration official have been publicly giving the thumbs up as the Japanese yen has set record after record in the international currency markets. The idea is that a strong yen will help cut the huge U.S. trade deficit with Japan.

But as the yen continues to test new highs against the battered dollar, few think the administration's wishes will come true. In fact, many economists are worried that the strategy will backfire, driving Japan deeper into recession and importing inflation to the United States.

In addition, the yen's power drive has served to further complicate trade talks between Japan and the United States. As the yen strengthens, Japan could be less willing to make the painful trade concessions demanded by Washington.

A strengthened yen means each dollar can buy fewer yen.

Today, $1 buys about 105 yen; at the beginning of this year, a greenback bought 125 yen. In theory, Japanese imports should be more expensive -- and less attractive -- to U.S. consumers, while U.S. products should be cheaper in Japan.

Though the yen has weakened the past two days on political uncertainty in Japan, it is still up 16 percent since January, setting a postwar high of 105 yen on Monday. The past couple of days, investors have been worried by suggestions that Prime Minister Kiichi Miyazawa could lose a no-confidence motion against him today, analysts said, and a drop in the Nikkei index has led to some selling.

The yen ended the day yesterday at 106.46, up from 105.80 Tuesday, according to a composite rate compiled by Bloomberg Business News.

Some think the yen will strengthen further. Salomon Brothers Inc.'s chief economist, John Lipsky, said it could test 100 to a dollar by July. "It definitely can go further. The yen has not peaked," Mr. Lipsky said.

Economists agree that part of the yen's rise has stemmed from economic fundamentals.

Japan's huge trade surplus and relatively tight monetary policy have helped make it attractive to currency buyers.

But on top of that has come a series of comments by U.S. officials that the yen was too weak and should continue to rise against the dollar. In February, for example, Treasury Secretary Lloyd Bentsen triggered a yen rally by calling for a strong yen to shrink Japan's trade surplus.

That comment, as well as others by the Clinton administration in the ensuing months, increased speculation that the Federal Reserve Board would not wholeheartedly support the dollar, allowing it to fall lower against the yen. Despite some Fed intervention in currency markets in recent days, the dollar has dropped almost daily.

In theory, the stronger yen is supposed to price Japanese goods out of the U.S. market.

For example, the stronger yen has helped prompt Japanese carmakers to increase the price of 1994 models by an average $1,400, while Detroit's models are to go up $700. The result BTC should be fewer Japanese cars sold, fewer cars imported from Japan and a lower trade deficit.

But if history is any guide, it might not be that simple. Over the past decade, the yen has strengthened from 260 to the dollar in 1984 to its current level, but Japan's trade surplus with the United States hit a record $49.6 billion last year and has set records almost every month this year.

The reason is that Japan's flexible economy has adapted to the stronger yen. Much of the labor-intensive work has been farmed out to lower-wage countries in Asia, and the country's export industries have moved into areas where U.S. consumers don't ** mind spending more for high quality.

"The yen has appreciated 10 percent a year over the past 20 years, but despite this, the trade imbalance has just gotten worse," said Keith Gardner, who runs a global bond fund for Legg Mason Wood Walker Inc.

Besides doing little for the trade surplus, the strong yen could delay Japan's recovery from recession by as much as a year and possibly increase inflation in the United States.

Though Japanese industry is adjusting to the higher yen, the country is vulnerable. Instead of merely crimping a boom, as the stronger yen did when it strengthened in 1986, the stronger yen now is seen as twisting a knife into a recession-wounded economy.

Some economic models show that Japanese companies could return to profitability this year if the yen was trading at 115 to the dollar. But at 105 to the dollar or less, the companies wouldn't turn that corner for yet another year. The result: a depressed economy with little need for U.S. goods.

"The stronger yen is exacerbating the recession. In the long run, that doesn't help the United States," said Dave Abramson, associate editor of the Montreal-based Forexcast newsletter.

Another worry is inflation, Mr. Abramson said. If Americans continue to buy Japanese products despite their higher prices -- such as the costlier 1994 cars -- the new prices are expected to boost U.S. inflation.

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