Surging Japanese yen overtakes penny in value

June 28, 1994|By Thomas Easton | Thomas Easton,Tokyo Bureau of The Sun

TOKYO -- Japan, already gripped by political turmoil, now faces a full-blown currency crisis.

The yen became more valuable than the penny yesterday for the first time since World War II, as financial markets shrugged off strong central bank intervention. The losing struggle between the Bank of Japan and the market became evident early in the day, with the yen steadily rising despite the bank's purchase of billions of U.S. dollars.

"The fear," said David Snoddy, a financial analyst at Jardine Fleming, an investment bank, "is that nobody knows why this is happening."

At the end of trading, the yen was quoted at 99.93 to the U.S. dollar, down just a fraction from a high of 99.5 and, importantly, cracking the psychological barrier of yen-penny parity. The previous low was 100.40, set Friday.

[The dollar also closed under 100 yen in London, finishing the day at 99.96 yen, but stabilized slightly in New York, where it closed at 100.45 yen, down from Friday's close of 100.60.]

The yen's new level is the headline story in newspapers throughout Japan. At its current rate, there is no correlation between prices here and those anywhere else on Earth.

News programs are filled with the predictable kaleidoscope of reactions: Manufacturers of cars and electronics express anguish and mutter about having to raise the price of their exported goods; importers of cars and food can barely contain their joy; foreign tourists groan at the cost of even the shortest stay in Japan; and Japanese leaving to go abroad talk about the delights of riding happily on a strong currency.

At Citibank, perhaps the most popular financial institution for employees of U.S. companies in Japan, phone lines for the conversion of dollars into yen were jammed yesterday as panicked expatriates converted currency rather than risk further erosion in the value of their money.

The most recent rise in the value of Japan's money continues a trend evident since the early 1970s, when it was delinked from its post-war rate of 360 yen to the dollar. In the past, however, the yen's increase in value has occurred when the country's economic growth was far stronger and the attractiveness of domestic production more evident.

The latest surge has caused alarm in Japan as one industrial company after another has shifted manufacturing to less costly sites outside the country. Companies continuing to produce in Japan are beginning to consider increased purchases of crucial materials -- such as steel and parts -- from abroad, breaking the domestic suppliers' hold.

The new high for the yen comes just as Japan seems to be pulling out of its worst recession in almost a half-century. Similar rebounds during the past 30 months have faded after new highs in the yen, and in almost every forecast now being issued in Tokyo there is an ominous caveat that this could occur again.

In explaining the strength of the Japanese currency, economists point to numerous factors ranging from monetary policy throughout the world, to inflationary expectations in the United States. But the single factor that appears to cut across all analysis is the persistently strong trade surplus posted by Japan.

Next to the surplus exists a painful paradox. That is the bewildering fact that Japanese consumers cannot afford products sold here -- even those made in Japan -- for anything like the prices charged abroad. This has been a strong impetus here for political reforms that could crack the government-fostered web of regulations blocking imports.

Yet the initial triumph of political reform last summer has stalled. The latest government resigned Saturday and, in a general chaotic scramble for power, it is possible that a ruling coalition will emerge that has little commitment to change -- or any consistent policy.

Yesterday, representatives met from the Liberal Democratic Party, a conservative group that led Japan for 38 years until being booted from power last summer after repeated scandals, and the Social Democratic Party, the left-leaning opposition during the LDP's long tenure.

Neither the LDP nor the socialists have set out any new platform, except in broad terms to disagree with each other's positions on taxes, defense and other core governmental issues. Were the two to jointly govern, said Hiroshi Kumagai, a senior Cabinet official and chief spokesman in the outgoing government, the yencould rise to 80 against the dollar, presumably because of the resulting instability.

Since last July, the United States has been involved in often testy negotiations with Japanese officials to widen market access and thus diminish the country's persistent trade surpluses. Those discussions appear to have been put on hold with the demise of Japan's government.

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