The Yen Is Cornering Japan Inc.

Not since the aftermath of the 1985 Plaza Accord to devalue the dollar has Japan seen such public displays of high-yen hysteria. "Yen Shock," screamed the headline in one of Tokyo's afternoon tabloids as the Japanese currency sailed to an all-time high of 116 to the dollar on Feb. 23. "This really troubles me," moaned Shochiro Toyoda, president of Toyota Motor Corp.

When the industrial world's finance ministers gathered in New York more than seven years ago, boosting the value of the yen and reshaping the export-fueled Japanese economy were high on their agenda. And although the yen has risen sharply, little has happened to make the Japanese focus on domestic demand as their engine of growth. But now, with the yen soaring again as the U. S. and other Group of Seven allies scream for Tokyo to reduce its $115 billion trade surplus (charts), Japan may finally be moving on its long-awaited domestic overhaul.

CUTTING CAMPAIGN. Already battered by the worst recession in two decades, Corporate Japan is stepping up the pace of its most wide-ranging restructuring campaign since the oil shocks of the 1970s, shedding tens of thousands of workers in an all-out effort to cutcosts. That's putting pressure on Prime Minister Kiichi Miyazawa to spend even more than the $90 billion he promised last fall. Bank of Japan Governor Yasushi Mieno may help out with more interest-rate cuts. "Normally, the consensus in time of recession would be to export their way out of trouble," notes Francis J. K. Ledwidge, director of international investment advisory at Bankers Trust Co. "This time around, they can't do it."

Indeed, with the yen up 124% since 1985, Japanese industry can ill afford another currency shock. Toyota, for example, estimates it will lose $350 million in revenues if the greenback remains at its current level. With the yen thus tightening the squeeze on Japan's economy, it's no surprise that corporations are getting more hard-nosed than ever. Take Nissan Motor Co. Facing an estimated $250 million loss for the fiscal year ending Mar. 31, it is planning to close one major assembly plant in 1995, slash capital spending by 15%, to $1.7 billion, and cut its domestic work force from 53,000 to 48,000 through attrition and reduced hiring.

Nissan also will reduce its catalog of model variations by 35%. The goal, says Executive Vice-President Atsushi Muramatsu, is "to secure a reasonable level of profits," even with no output growth.Just closing its 29-year-old Zama assembly plant southwest of Tokyo, once the carmaker's most automated showpiece, will save Nissan some $87 million. Production will shift to an $850 million plant in Kyushu that opened last year. Other auto makers are expected to follow Nissan's example while stepping up lower-cost production offshore. Toyota plans to increase its Thai car and truck output by 135%, to 200,000 vehicles a year, by 1996.

Industries that depend heavily on the ailing domestic economy are restructuring with equal alacrity. Battered by losses on local calling and by mounting competition for long-distance service, Nippon Telegraph & Telephone Corp. will slash 30,000 of its 230,000 workers from the company payroll by 1996. It will close hundreds of sales offices and encourage employees to retire as early as age 45. NTT already has shed 40,000 workers since 1990.

Japan's hard-pressed financial industry also seems set for a workover, with help from the Bank of Japan's Mieno. He wants banks to speed disposal of nonperforming loans and write off hundreds of billions of dollars' worth of bad debts. While the discount rate already has fallen to an all-time low of 2.5%, analysts feel Mineo will continue pushing yields lower to ease the banks' burden. Indeed, the strong yen will make it easy for Mieno to cut rates. "We'll see a fairly aggressive easing of monetary policy," says David Webb, Asia-Pacific research chief at Chase Manhattan Private Bank.

TAX BREAKS. The same seems true for fiscal policy. Prime Minister Miyazawa can use the high yen to deflect mounting trade pressure from the Clinton Administration and provide a pretext for launching a new domestic-spending plan. Some analysts even suspect the Finance Ministry has been helping prop up the yen by urging big Japanese investors not to buy dollars. Such a position is receiving Washington's open support. "I'd like to see a stronger yen," proclaims Treasury Secretary Lloyd M. Bentsen. Adds another Administration aide: "This is a costless attempt to lower the trade surplus."

With the yen up, Miyazawa's government is close to stepping on the gas. Using the specter of yen-inflicted economic pain as leverage, Hiroshi Mitsuzuka, head of the ruling Liberal Democratic Party's Policy Research Council, summoned Finance Ministry officials on Feb. 23 to map out a forceful new program of public-works spending, investment incentives, and tax breaks for housing this year. Analysts speculate Miyazawa will also propose as much as $35 billion in tax cuts later on. It may take a recession and currency crisis to prompt the Japanese to act. But after seven long years, government and business leaders finally seem ready to make a domestic economic overhaul priority No. 1.

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