High Yen, Low AnxietyRobert Neff
On the surface, the yen's recent surge seems to have all the makings of a full-blown crisis. In the short span between Feb. 27 and Mar. 15, the yen rose a vertigo-inducing 8% against the dollar. Meanwhile, the Nikkei stock index, already slumping after the Kobe earthquake, is wallowing near a 16-month low. Driving the sell orders is the fear that this turbocharged endaka could disrupt the Japanese export machine by forcing companies to swallow big foreign exchange losses or price themselves out of customers' reach.
Maybe. What's more likely is that Japan will weather its latest bout of endaka with more aplomb than usual. Cassandras notwithstanding, most economists in Tokyo figure Japan's economy will keep growing, even in the worst-case scenario of the yen rising from just under 90 to the dollar now to 85. And while exporters will strive to keep their clout, Japanese companies and consumers stand to reap major benefits as the stream of cheaper imports steadily picks up. Indeed, evidence is mounting that the stronger yen is paying off already for consumers and importers.
How does Japan's export machine keep on chugging? Part of the answer is that Japanese companies have almost 10 years' experience coping with a steadily rising yen. Since 1985, the currency has almost tripled in value. Last year alone, it rose by 10.8%. Yet most Japanese companies made money even when the yen rose above their putative breakeven levels. Japanese corporate profits for the year ending March 31 should rise 7.5% overall, according to Morgan Stanley International Inc. Companies have done this by shifting production offshore and cutting costs ruthlessly at home. Toyota Motor Corp. cut $2.2 billion in the 18 months through December, 1994, and expects to make an additional $770 million in cuts through June.
The stranglehold some Japanese industries have on world markets also leaves exporters room to raise prices. Kyocera Corp., by far the largest supplier of ceramic semiconductor packages and other ceramic products, already has said it will "ask" customers to accept price hikes of about 10%. NEC Corp., buoyed by surging demand for memory chips, is considering price hikes, too.
To be sure, a sustained high yen is bound to trim exports. But economists such as Dick Beason of James Capel Pacific Ltd. in Tokyo are still forecasting gross domestic product growth of anywhere between 2.6% and 3.2% this year. A key reason GDP will rise is that the exporters' pain is importers' gain: Japan's domestic economy will benefit from cheaper prices of imported food, oil products, and paper.
Then there is the big lift Japanese industry is getting from investment overseas. Over the past few years, Japanese companies have moved more of their factories into countries such as Thailand, Malaysia, and China, where currencies are slumping against the yen.
INSULATION. As a result, such components as semiconductors, car parts, and video displays that are imported from these offshore plants cost less. "These `reverse imports' have reduced the negative impact of currency strength on profitability," says Jesper Koll, chief strategist at J.P. Morgan Securities Asia Ltd. NEC, for example, "re-imports" several hundred thousand 4-megabit memory chips every month from the U.S. Fully two-thirds of the chips NEC sells overseas are made overseas, insulating the company from pricing pressures.
Japanese consumers are also benefiting from the stronger yen, which lets marketers of foreign consumer goods pass on savings. At Tower Records Inc. in Tokyo, Far East Managing Director Keith Cahoon has been able to slash prices of some of his imported compact disks by 20% since last year. McDonald's Co. (Japan) Ltd. plans 30% price cuts for its burgers as the strong yen lowers the cost of imported beef.
Far from seeing the stronger yen as a crisis, some Japanese leaders are again using its strength to lecture Americans on their need for a stronger dollar. Kyocera Chairman Kazuo Inamori, an influential business leader, believes that higher prices on quality Japanese goods will teach the Americans a lesson. To the extent U.S. consumers must swallow price hikes, he believes, the better they'll understand the cost of a weaker dollar and the more they'll demand that Washington move to strengthen its currency. Until Washington does so, Japan will continue to grow in a high-yen world.