International Business: Commentary
DON'T BE FOOLED BY THE MUSCLEBOUND YEN
When George Soros admitted recently that he'd lost some $600 million by betting on a weaker yen, he joined a long list of investors who came a cropper over the past year while waiting for the Japanese currency to fall. With the yen now around 104 to the dollar, it looks as if it may be time for the yen bears to throw in the towel.
But if they do, they may live to regret it. After many false starts, the yen really does look set to turn around and head south. Many savvy traders now think the dollar will climb as much as 6% in the next few months, to 110 yen. Some even see the greenback's value surging all the way to 125 yen by yearend.
Why? Money mavens argue that economic and corporate fundamentals will inexorably pull the yen toward the 140-to-the-dollar rate that Paul Chertkow, head of global currency research for Union Bank of Switzerland, terms "fair value." Traders think political forces will ultimately move in the dollar's favor, too. The trade battle between Tokyo and Washington that is keeping the yen in orbit is just too risky to sustain. Not only does it threaten Japan's ability to recover from recession but it is already roiling stock and bond markets around the globe.
RATES RATE. Interest rates are on the dollar's side, as well. Why would anyone want to hold deposits or bonds in Japan, where rates are low and falling, rather than in America, where rates are rising? Right now, you can earn 3.9% on 10-year Japanese government bonds. But 30-year U.S. Treasuries are yielding 6.8%. "Since more money moves because of interest rates than any other cause, that's the important thing," says Mineko Sasaki-Smith, senior economist for Morgan Stanley Japan Ltd.
The yen bulls should also take note that the long-running appreciation of the Japanese currency is finally making a dent in Japan's trade surplus. Sure, Japan posted a record $131 billion current-account surplus for 1993. But in Japanese currency, the trade surplus fell slightly, from 14.9 trillion yen in 1992 to 14.4 trillion. Despite Japan's recession, import volumes have been rising at a 6% to 7% annual clip.
As the yen soars even more, imports will flow into Japan as companies are forced to buy cheaper parts from abroad. Supermarket operator Daiei Inc., for example, plans to purchase everything from Brazilian orange juice to South Korean dish detergent. The company recently signed up German film manufacturer Agfa-Gevaert to supply 12 million rolls of color film a year, which it will offer as a discounted store brand, in addition to the higher-priced Fuji Film it also stocks. Canon Inc., meanwhile, plans to import $480 million in parts this year, up 43% from last year. And Honda Motor Co., in disclosing that it's assuming a yen-dollar rate of 105 in making plans for the coming year, may actually be sending out a signal that it and other manufacturers will continue to move production offshore to cut costs.
When such changes in corporate behavior show up in the trade numbers in the next few months, the yen will inevitably come back to earth. U.S. Treasury officials may think they're using the high yen to twist Japan's arm on trade, but this will only work as long as the market is on their side. It won't be for long.Larry Holyoke