Enduring EndakaRobert Neff and Larry Holyoke
Henry D.G. Wallace knows firsthand the shock of the surging yen. The veteran Ford Motor Co. manager just moved to Hiroshima to help fix Mazda Motor Corp., which is 25% owned by Ford and lost $466 million last year. The yen's might has made a difficult fix-it job a lot tougher. "Even at 105 [yen to the dollar], we were in a loss-making position," says Wallace, a Mazda executive vice-president. "And now we've seen it strengthen to 97."
The yen's surge beyond the psychologically sensitive 100 yen/dollar threshold is sending tremors throughout Japanese boardrooms. Executives are worried that the costlier yen will further drive up prices of their exports and force them to move even more manufacturing overseas--all at the cost of jobs in recession-weary Japan. "I worry that after all this waiting, endaka [the surging yen] will throw water on our economic recovery," says Takashi Kitaoka, president of Mitsubishi Electric Corp.
It's crunch time, all right. But any rival or investor betting that the latest yen surge will permanently weaken Japan's competitive position is making a big mistake. Instead, the chances are that after considerable pain and readjustment, major Japanese corporations will learn how to live with a stronger yen--and keep up the pressure on rivals worldwide.
Of course, the stronger yen does give U.S. companies a major opportunity to regain some turf, especially in key areas such as autos. Christopher W. Cedergren, senior vice-president at market researcher AutoPacific Group Inc., reckons that prices on Japanese cars in the U.S. could rise 6% to 8% this fall. In contrast, General Motors Corp. recently announced an average price hike of only 2.9% for its 1995 models. Ford's prices will be up just 2.2%. In Japan's home market, too, cheaper imports from the U.S. and Europe are rising rapidly.
The reality, though, is that Japanese executives have been coping pretty well with endaka for years. "The usual cost-cutting methods for Japan Inc. are still working quite nicely," says Jesper Koll, chief economist at S.G. Warburg Securities (Japan) Inc. He and others believe Japan's ostensible high-yen ills are overblown. The betting in Japan is that Japan's new Socialist Prime Minister, Tomiichi Murayama, is unlikely to rile business by succumbing to pressure from President Clinton for more open Japanese markets. And Koll's data indicate that Japanese companies have managed to cut costs at the same rate the yen has risen (chart).
FEW PROSPECTS. Mazda, for example, plans to shed 3,000 jobs. It's also paring model offerings and streamlining distribution. Wallace says measures now under way will make the company profitable at 100 yen to the dollar and eventually at 95. "We're making sure we're structured to face uncertainties," he says. Mitsubishi Motors Corp. is boosting car production at its Normal (Ill.) plant to diminish exposure to exchange rate risk. "This will help make us more price-competitive, so I expect our sales to rise this year," says Taizo Yokoyama, managing director.
The cost-saving strategies of Japan's mightiest corporations will have a short-term impact on the labor market. Soon-to-graduate college students now face the prospect of no job offers. "The situation is very severe," says Takeshi Furihata, deputy placement director at Kokugakuin University in Tokyo. He says offers for his students are down by about 30% from last year. Hardest hit are young women grads, against whom companies still feel free to discriminate.
Still, few experts see much danger for serious unemployment in Japan. The jobless rate now stands at a modest and stable 2.8%. The darkest of pessimists predict something a bit more than 3%, far below other major economies. Indeed, employment rose 0.5% in May, even as the yen was climbing. Warburg's Koll says Japan's service sector has added an average of 180,000 jobs a month since Japan's recession started in 1991, soaking up workers who might otherwise be idle. Helping lead the way are discount retailers and health-care providers.
These employed Japanese are also buying more consumer goods than ever. At Kao Corp., Japan's largest maker of household and personal-care products, sales and profits have been growing steadily, and analysts expect that to continue. The growth comes even though Kao Vice-President Kazuya Inbe admits that competition from cheaper imports is growing more severe and that overseas rivals such as Procter & Gamble Co. are doing very well in Japan. But Inbe says Kao remains determined to maintain "reasonable" prices of the threat.
Helping Kao hold the line on prices at home is the fact that a surging yen cuts both ways for Japanese companies. While Kao's rivals can sell at lower prices in Japan, every uptick in the yen lowers the costs of the vast quantities of raw materials Kao buys from abroad.
By making investment overseas cheaper, the stronger yen is also helping Japanese companies turn most of Asia into an industrial suburb of Japan (BW--May 23). Japanese companies are continuing to blanket Asia with plants and marketing organizations at discount prices. "The yen problem is short-term," says AutoPacific's Cedergren. Longer term, given their zeal for cost reduction, the Japanese likely will turn their problems into a competitive advantage.