In the contest of currencies since the industrial world's fixed exchange rate system collapsed more than two decades ago, the yen stands out as the long-distance champion. Twenty-five years ago, the Japanese needed 360 yen to buy one U.S. dollar. With their nation accumulating nearly $1 trillion in trade surpluses since the late 1970s, however, the Japanese can now buy a greenback for a bargain-basement price of less than 90. This year alone, the yen's value in dollars has shot up 12%.

The superyen has bankrolled Japan's dramatic push into Asia, just as it financed its move into the U.S. But despite the currency's extraordinary appreciation, it would be a mistake to assume it will gain indefinitely. Not only does the dollar remain the preeminent currency of international finance and trade but it also may benefit in coming months from a shift in global growth patterns, interest rates, and capital flows.

EXTRA HEFT. Some doubts about the yen's chances for further huge gains stem from Japan's reluctance to see it become a truly global currency. That gives the deficit-plagued dollar some heft it otherwise might lack. With 60% of America's banknotes circulating overseas--and many emerging economies pegging their currencies to the dollar--the buck is still the preferred medium of exchange from Guayaquil to Guangzhou. The dollar's share of world foreign exchange reserves remains around 55% today, notes Kemper Financial Services Inc. economist David D. Hale.

The yen accounts for a mere 9%, little changed from its level of a decade ago. And while 15% of all Eurobond issues are now denominated in yen, most of these bonds are issued by Japanese companies and sold to Japanese investors. Many foreigners are reluctant to borrow in yen. Japan's barriers to foreign direct investment prevent them from earning enough yen to repay their debts.

Despite Japan's unwillingness to see the yen play a greater global role, the country's recent economic policies have all but ensured that the currency would rise. Trying to overcome the hangover of the easy-money-fueled bubble economy of the 1980s, Japanese monetary and fiscal authorities have pursued a hard-money strategy of slow growth and deflation. That has helped cool global price pressures and permitted the U.S. to follow the opposite course: robust growth and tolerance of modest inflation. But with Merrill Lynch & Co. estimating that Japanese investors already have $400 billion in unrealized foreign exchange losses on their books, their willingness to recycle their trade surpluses back into dollars has been fading.

However, 1995 could see both countries change course. Many economists expect the Federal Reserve to raise interest rates again this spring to rein in the U.S. economy. That should dampen inflation jitters and shrink the U.S. trade deficit. At the same time, Japanese officials are conceding that their economy may not be able to stand much more pressure from the yen. Acknowledging this, Finance Minister Masayoshi Takemura on Mar. 27 promised a new government spending plan to spur growth. In an unusually strong statement, he suggested that the Bank of Japan should cut rates. The bank will probably respond by slashing its record-low discount rate by 50 basis points, to 1.25%, this spring. Perhaps foreshadowing this, the bank has already pushed money-market rates to a six-month low. Coming on top of heavy central bank purchases of dollars, those moves have led some economists to think Japanese authorities would like the greenback to return to 96 yen, or maybe even 100.

If anything, Japan's new Asian investment focus could help this trend along. As Japanese manufacturers replace domestic production with goods from their new Asian factories, imports should rise, and the country's trade surplus should decline. It may never dwindle enough to make the yen a weak currency again. Even if it does, the yen should remain a relatively strong currency for years to come. But for now, some of the forces pumping the Japanese currency up could be taking a break.

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