Yen's Surge Felt Overseas

April 11, 1995|By Thomas Easton | Thomas Easton,Tokyo Bureau of The Sun

TOKYO -- Currency crises are typically too amorphous to produce demonstrable pain, but yesterday's brief surge in the value of Japanese yen to 80 to the dollar raised genuine concerns in Tokyo about an international economic crunch that won't spare America.

"You don't get meltdowns in major currencies for free," said Kenneth C. Courtis, senior economist at Deutsche Bank Capital Markets. "Pressures build. For the moment, currency is the safety valve, but then the pressures will spread to interest rates and equity markets."

That, according to Mr. Courtis, means lower stock markets in not only Tokyo, but New York, and higher interest rates around the world.

As is always the case with financial markets, the transmission mechanism is far from clear, but its roots begin and end in the real economy. On one end of Mr. Courtis' scenario is the immediate, harsh impact of a fast rise in the yen on Japanese companies. On the other end is the effect that will have on Japanese banks and whether they, in turn, will have to pull back on financing not only Japanese companies, but their vast holdings of U.S. government debt.

Mr. Courtis is only one pessimist in a city increasingly full of them. As the yen has risen, near-term expectations about economic growth in Japan have been shaved by almost every bank and think tank in Tokyo. The pessimism has spilled over to the Tokyo stock market which, notwithstanding an occasional bounce, has been mired in a large decline.

For the Japanese economy, the initial impact of the high yen is relatively higher production costs for anything, be it cars, radios, apples. At close to 80 yen to the dollar, compensation for secretaries and assembly-line workers can approach $100,000, with midlevel white collar workers earning even more.

A high yen should reduce other costs. Japan's oil imports, for instance, are priced in dollars. But the benefits aren't being passed on. Electric utilities and Tokyo cab companies have kept prices roughly the same or increased them, even as what they must pay for a key raw material has declined.

Swaddled in numerous protective regulations, the winners from the higher yen resist change and the government has proved incapable of introducing the kind of competition, particularly from abroad, that would increase imports and bring prices down.

In the wake of yesterday's tumultuous rise of the yen, the Japanese government followed what has become a familiar strategy: blame the markets, blame foreigners, pledge to do something. Finance Minister Masayoshi Takemura said the international currency system should be re-thought, and he blamed the United States for not doing enough to support the dollar.

Prime Minister Tomiichi Murayama pledged to announce emergency measures by Friday, including tax breaks and more deregulation. There is little optimism in Japan's financial community that it will be meaningful.

"Something major is just not in the cards," said Kathy Matsui, strategist for the Tokyo office of Goldman Sachs. "We'd like to see cheaper lettuce and tomato prices, but it's just not going to happen."

Over time Japan can adjust to a high yen by following a plan it has already begun to put into effect, steadily shifting the production of cheaper items offshore where costs are lower and continuing to streamline domestic manufacturing operations.

But shipping jobs offshore and benefiting from the results is a process of years, not months or weeks. The yen has been moving at a far faster pace, up almost 20 percent since early January, and 40 percent from early 1993.

For the numerous businesses remaining at home, and the many companies that can only gradually ship production overseas, the high yen can be crippling.

Mr. Courtis' scenario unfolds as follows: The yen jolt undermines the tepid economic recovery Japan has recently being experiencing. That destroys corporate profits and, as a result, the price of stocks trading on the Tokyo markets. Lower share prices, in turn, cripple Japanese banks which, unlike banks in the United States, rely on equity securities priced on the major exchanges for significant portions of their capital.

Bank lending in Japan is already in its first protracted decline since World War II and any reduction in capital would only further constrain loans, Mr. Courtis says.

The resulting drag on the economy from reduced credit results in a vicious circle, hurting companies and prompting a further decline in share prices.

Banks react in the worst way possible, dumping stocks to bolster their own results, providing yet another reason for stocks to decline. Then, they begin selling off their other marketable assets, most notably portfolios of U.S. Treasury bonds. The consequence is higher interest rates in the United States.

Only three months ago a 100-yen dollar was considered striking, and a 90-yen dollar remarkable. Pessimistic business plans tended to be based on 95 yen to the dollar. In currency trading rooms there now is open discussion of a 70-yen dollar and conjecture about whether the dollar could soon fall into the 60s.

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