Until recently, the conventional wisdom was that the Japanese yen was so overvalued against the dollar that both Japan's huge trade surplus and the yen itself would soon begin to decline significantly. Now, opinion is divided.

For one thing, after a sluggish period, Japanese exports have recently turned up and seem likely to strengthen further as global economic activity quickens. Further, even if the trade surplus declines, economist Michael R. Rosenberg of Merrill, Lynch & Co. thinks the yen could remain strong.

The reason is Japan's growing investment stake overseas and the income it is throwing off. A dozen years ago, Japan's net foreign assets were a paltry $25 billion. But since then, as trade receipts have mounted, its overseas stake has soared to an estimated $700 billion-plus (chart). And the income earned on these assets in the form of profits, dividends, and interest has jumped to $40 billion.

For the yen to decline, notes Rosenberg, Japan must begin to reduce its current-account surplus, which is basically composed of net trade receipts and net foreign investment income. But current trends suggest that Japan's net overseas assets should exceed $1 trillion by the year 2000, producing net income of at least $70 billion a year.

The upshot is that unless Japan can shrink its trade surplus faster than its net foreign income grows, its current-account surplus will widen. And that spells upward pressure on the yen.

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