The Yen's Peak Has Passed

It was a long time coming, but the Japanese trade surplus and the value of the yen both appear to be receding. The surplus has now fallen from year-earlier levels for three straight months and is down on a seasonally adjusted basis, from a $130 billion annual rate in February to $102 billion in October. With import volumes up 18% over the past year and rising far faster than exports, economists at Salomon Brothers Inc. think the surplus could fall to half its peak level within a year.

The shrinking surplus has already helped stabilize the yen-dollar exchange rate and should put downward pressure on the yen as it continues. But Solly's economists also note that Japanese investors are gradually becoming more willing to add to their holdings of long-term foreign securities, particularly foreign bonds. At the same time, foreign investors have recently become net sellers of both Japanese bonds and equities.

These shifts in capital flows, combined with Japan's shrinking trade surplus, suggest that the yen will weaken modestly over the next year, Solly says.