In the past five years of the Clinton Administration, currency traders could count on this: Washington wanted a strong dollar and a steady yen to break Japan of using cheap exports as a quick economic fix and spur its consumers to spend at home. The Clinton Administration is barely out the door, and foreign exchange markets are already buzzing that the coast is clear to sell the yen. Why? Realpolitik. President-elect George W. Bush's team seems resigned to the view that Japan has no alternative but to boost exports to halt its latest downturn. Japanese policymakers have shifted, too, and are taking advantage of the U.S. interregnum to talk down the yen.
There have been no formal statements, but remarks from both sides of the Pacific are working their magic on the markets. In December, Bush's top economic adviser, Lawrence B. Lindsey, said the U.S. should stop pressing Japan to stimulate its economy with deficit spending, even if that meant more reliance on exports to the U.S. On Jan. 5, Finance Minister Kiichi Miyazawa, asked whether he would intervene to support the currency, said "the yen's movement should be left alone"--whereupon the currency promptly weakened further. Nobody in the U.S. objected to that statement.
Now the slide is under way. Before it began to fall in late November, the yen had fluctuated between 100 and 110 to the dollar for over a year. By Jan. 10, it was over 116. Merrill Lynch & Co. Senior Economist Jesper Koll predicts it will reach 130 by June.
What's so bad about that? It certainly makes sense from Japan's point of view, says Nicholas Sargen, global market strategist at J.P. Morgan Chase & Co.'s private bank. After steep declines in business investment and consumer spending in November and a 36% fall in the Nikkei index since last April, officials now worry about a new recession. "Japan can't do pump priming," says Sargen. "Its deficit is 10% of GDP. It has no other option but weakening the currency."
Meanwhile, Lindsey on Jan. 6 reiterated his support for a strong dollar. That is particularly important as the U.S. economy slows because the policy helps keep foreign capital--including Japanese cash--flowing in to fund the gaping U.S. current-account deficit. A dollar exodus would be bad news during a time when market psychology is shaky. Keeping the dollar strong against the yen is seen as especially critical as the greenback weakens against the euro.
But the yen slump does pose risks. If the dollar goes over 145 yen, as it did in 1998, U.S. producers in currency-sensitive heavy industries are sure to protest. And they'll turn to incoming Treasury Secretary Paul H. O'Neill, former chairman of aluminum giant Alcoa Inc. If a Japanese export boom "comes at our industries' expense at a time of a slowing economy," says a Bush adviser, "there is going to be serious domestic pressure on us to do something about it."
ADDED PRESSURE. Some Japanese companies fear a backlash. A weak yen "of course, is good news for us," admits Honda Motor Co. Executive Vice-President Koichi Amemiya. Still, "bearing in mind the history of trade friction, we must remain prudent."
What's good for Japan may add to the pressure for South Korea and other exporters in Asia. The engineered drop in the yen starting in mid-1995 made Japan's goods very competitive against those of its Asian neighbors, most of which had pegged their currencies to the dollar. Their trade surpluses and reserves evaporated, setting the stage for the 1997 Asian currency crisis.
Now, a jump in Japanese exports due to a weak yen will likely hit those economies hard again. A big portion of Korean exports are semiconductors, ships, petrochemicals, and computers, which compete directly with Japanese goods. Analysts have already trimmed growth figures for Korea and several other Asian nations partly because of the weaker yen.
In all events, depreciation is nothing more than a short-term solution for Japan. A Bush economic adviser said as much: "I don't know how they get out of the box they're in without substantial restructuring, writing off debt, having a real banking system, and getting people to take risks." That's still the bottom line.