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Coping With The Strong Yen

Economic Trends


How Japanese exports hang tough

To put it mildly, Japan's trade performance in the first half of the 1990s has defied expectations. After appreciating by some 30% against the dollar from 1985 to 1990, the yen rose an additional 35% or so through 1995--enough, one might think, to cripple Japan's exports and put a huge dent in its trade surplus. Instead, Japanese exports continued to rise, while the trade surplus has shrunk only modestly.

What's behind this performance? Japanese exporters reacted to the threat of a soaring yen, reports economist Thomas Klitgaard of the Federal Reserve Bank of New York, by slashing their export prices in yen terms and cutting profit margins to the bone. From 1990 to 1995, export prices of metals, textiles, chemicals, and electrical machinery declined by 24% to 36%. Although falling costs of imported oil and raw materials helped in the price-cutting drive, so did efforts to lower wages, hold down employment, and boost productivity.

At the same time, notes Klitgaard, many Japanese exporters shifted production from commodity-type goods to high-value quality products, such as luxury cars, which are less sensitive to price increases. And Japanese direct investment in nearby Asia accelerated, as manufacturers capitalized on low-cost labor abroad to turn out goods that had formerly been exported from Japan.

Thus, Japanese exports have benefited in three ways: from price-cutting, from the shift toward producing higher-value items at home, and from the surge in direct investment in Asia, which has fueled strong demand for Japanese machinery and components. Indeed, Japan's merchandise trade surplus with Asia has been running at a $60 billion annual clip.

In sum, although Japan's imports have recently been rising at a rapid rate (particularly from its factories in neighboring nations), Klitgaard notes that its exports are so much larger that its trade surplus is unlikely to shrink very much as long as Japanese exporters continue to find ways to stay competitive.By Gene KoretzReturn to top

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What the storm stole from GDP

As if economists weren't already in a fog caused by the data drought during the government shutdowns, along comes the Blizzard of '96 to further obstruct their view. So how much will the winter storm's paralyzing effects dampen first-quarter economic growth?

Steven S. Roach, chief economist at Morgan Stanley & Co., has a back-of-the-envelope analysis that makes as much sense as any. He assumes that output during the week of the storm was cut in half in the areas most affected--11 states plus the District of Columbia, which represent roughly a third of the U.S. economy. Since real weekly output in a $5.5 trillion economy averages around $100 billion, one half of one third of that comes to $16 billion. Figuring that half of that is recouped by added work in subsequent weeks, Roach put the net loss caused by the blizzard at around $8 billion--enough to subtract about 0.3 percentage points from first-quarter GDP growth.By Gene KoretzReturn to top


Does age hurt forecasters' picks?

Age and wisdom are supposed to be positively correlated, if only because accumulated experience is an invaluable teacher. But in the case of economic forecasters--or rather, highly successful economic forecasters--the correlation may in fact be negative.

That, at any rate, is the implication of a new study by economist Owen Lamont of the University of Chicago. Lamont analyzed the forecasts of 15 econometric models and 118 economists whose views appeared on numerous occasions in the yearend outlook issues of BUSINESS WEEK from 1971 through 1992. Other economists have found that consensus forecasts of economic growth, inflation, and other variables are usually the most accurate.

Looking at forecasts of individuals, however, Lamont found that (unlike the econometric models surveyed) they tended to make bolder, less accurate forecasts as they aged--moving away from the consensus. Moreover, this trend was especially pronounced among the 11 forecasters surveyed who established firms bearing their own names during the 22-year period under study.

Why do independent forecasters tend to go out on shaky limbs as they age? Lamont isn't sure, but one theory is that they feel that radical predictions draw more attention than consensus views--and win them accolades on the few occasions when they come close to the mark.By Gene KoretzReturn to top

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