Currency traders call it the "red zone," that dangerous area where the dollar drops to 75 yen. With the dollar not much above 80, alarm bells are going off. The greenback is firming against the German mark and the yen stands exposed as the global problem currency, which no amount of financial fine-tuning can fix. The dollar crisis has become a yen crisis, in truth an import crisis. Japan's only hope of regaining control of its currency is to lower its trade barriers.
The faint sound of protectionist walls crumbling may already be heard. Some Japanese politicians are now openly talking of accepting the original Clinton Administration plan for specific U.S. import targets. Liberal Democratic Party policy chief Koichi Kato, for example, is saying that Japan should accept a concrete plan to cut its trade surplus by a specific date and amount. Masaru Hayami, chairman of the Association of Corporate Executives, says Japan should "completely deregulate and liberate its markets."
The yen problem goes far beyond the U.S. The Japan that says "no" to the U.S. on trade is also saying "no" to the rest of Asia. Malaysian Prime Minister Mahathir Mohammed, the most pro-Japan leader in Asia, complains: "Manufactured products were and still are almost entirely restricted--except for those manufactured by Japanese-owned industries located overseas." Malaysia is not alone: The collective trade deficit of the six-member Association of South East Asian Nations with Japan is higher than America's.
Japan is also saying "no" to renegotiating Asia's huge yen-debt overhang. Japan has lent Asian countries $100 billion in yen credits, but these nations' exports go mainly to the U.S., which pays in dollars. Thus, Asia must pay off its yen-denominated debts with depreciating dollars. As they sell dollars and buy yen, Asian countries send the super yen even higher.
The policies erected by Japan to protect its domestic market are now doing the opposite. By curbing imports, Japan has created a monster yen that is eroding the competitiveness of the nation's manufacturers. The most efficient industries are abandoning the country to set up shop offshore, leaving the most inefficient behind. It is a disastrous policy for any nation.
What else short of a breakthrough in trade talks can stop the yen from hitting 60 or 70 to the dollar? Washington is not about to help by raising interest rates. After all, U.S. inflation is low, the economy is healthy, and the stock and bond markets are performing well. The solution has been staring Tokyo in the face for more than a decade--autos. Two-thirds of the U.S. trade deficit is in cars and parts. It's time to do a deal.
This is what it should look like: Japanese manufacturers, who own the auto dealers in Japan, should tell them to begin offering U.S. cars. The same Japanese auto makers, who have previously committed themselves to buying $19 billion of American-made parts, should double their purchases.
Detroit, for its part, must tailor cars to the Japanese market. Chrysler is already making right-hand-drive Jeeps. Ford and General Motors have made right-hand-drive autos in Britain for decades. Why not in Japan?
Washington has one major card to play. The Commerce Dept. administers "foreign trade zones" at Japanese auto plants throughout the U.S. The zones let companies import Japanese-made components tariff-free. Despite the availability of cheaper U.S. parts, the Japanese persist in importing billions in components. Unless Japan opens its market to American cars, there is no reason to provide subsidies to Japanese imports. This is a quid pro quo that should be enforced.