Separating The Kittens From The Tigers

The rise of the yen has brought nothing but good news to LG Electronics Co. Since the start of the year, the South Korean manufacturer of VCRs, televisions, microwave ovens, and other consumer goods has seen exports to Japan soar as the yen rises to record levels against the Korean won as well as the U.S. dollar. The company now anticipates its Japanese exports, which totaled some $278 million in 1994, to grow 56% this year. "We expect to make large profits if the yen stays where it is today," says Kim Young-June, executive vice-president at LG Electronics.

In Indonesia, the picture at conglomerate P.T. Astra International is decidedly less hopeful. The country's largest auto maker, Astra relies heavily on parts imported from Japan to assemble its Toyota cars and trucks. Although Astra posted a record year in profits and sales, analysts expect higher costs to kick in soon. Indeed about 55% of its cost of goods is denominated in yen. Much of that burden will be passed on to Indonesian consumers in retail price increases.

BIG CHIP. The latest bout of endaka is separating Asia's more established Tigers from their aspiring neighbors. For companies in South Korea and Taiwan that already produce high-quality consumer goods, the rise of the Japanese currency presents an opportunity to increase their exports to Asia, Europe, and North America. But Indonesia and other Southeast Asian countries with large yen-denominated loans face some pain, only partially offset by an expected increase in Japanese investment.

South Korea stands to gain the most from the strong yen. The rise of the Japanese currency has made its products on average 15% cheaper than a year ago, giving the chaebol, or conglomerates, a sizable advantage against Japanese rivals in industries such as semiconductors, cars, and consumer electronics. According to Seoul's Ministry of International Trade & Industry, Korean memory-chip sales could rise by $600 million in 1995, to $16.5 billion, if the yen were at 90 to the dollar. If the yen remains at around 80, chip exports could increase even more.

The higher yen has yet to help the Koreans decrease their need for Japanese components. South Korea last year had an $11.9 billion trade deficit with Japan, up from $8.5 billion in 1993, largely because of imports of capital goods and components. But now, companies such as Daewoo Electronics Co. are drastically reducing their Japanese imports. The company, which produces 80% of its parts domestically, wants to raise that to 95%. Daewoo will soon begin producing its own 29-in. cathode-ray tubes, instead of buying them from Japan.

Like the Koreans, the Taiwanese see a trade edge with the high yen. Taiwanese exports to Japan of personal computers, notebooks, and consumer electronics are expected to rise this year. Japan has provided 29% of Taiwan's $9 billion purchase of chips, but that's about to change. "We will shift from Japan chipmakers to U.S. and Korean," says Tu Tze-chen, director of the Market Intelligence Center of the Taipei Computer Assn. That may help slash Taipei's $15 billion trade deficit with Tokyo. Yet Taiwanese companies remain dependent on Japanese CRTs and liquid crystal displays.

While the higher cost of Japanese imports is stoking fears of inflation, Korea and Taiwan enjoy an advantage over most other Asian nations, since neither holds much yen-denominated debt. Less than 10% of South Korea's net foreign debt of $10.7 billion is in yen. The percentage is similarly negligible for Taiwan. "If you look at overall yen debt structure, Taiwan is in the healthiest position among its neighbors," says Lai Cheng-geng, treasury manager at American Express Bank in Taiwan.

Other nations aren't so fortunate. Indonesia holds 40% of its $92 billion debt in yen. Jakarta will spend more than $5 billion on debt servicing, 20% more than its economic planners had expected. The Philippines, Malaysia, and Thailand also hold significant yen-denominated loans. At the end of 1994, China's outstanding loans from Japan were about $16 billion, or 16% of its total.

Since most of the region's economies are linked to the dollar, the pain is particularly acute. Japanese bankers and bureaucrats have been unwilling to alter the terms of the loans. Even before the latest bout of endaka, Malaysian Prime Minister Mahathir Mohamad was complaining that Japan would not renegotiate loans dating from the 1970s. There is evidence to suggest that central bankers have been selling off greenbacks to diversify their foreign reserves, in part to pay off yen debt. That's causing a further rise in the yen.

SILVER LINING. But a yen bloc won't happen overnight. Most central banks still have about 60% of their foreign currency reserves in dollars, compared to some 15% in yen. "It's not easy to convert your assets or reserves quickly," says Nariman Behravesh, chief international economist at DRI/McGraw-Hill. For world reserves to achieve a balance between the dollar, the yen, and the German mark, "you're looking at another 15 to 20 years," he says.

Most Asian nations are hoping that the silver lining from the rise of the yen will come in vast new Japanese investments to the region. According to a Nikkei Research Institute of Industry & Markets survey, 38% of Japanese companies in the electronics, auto, and precision-tool industries plan to build or expand production in Asia. Malaysia, which has been attracting heavy investments from Japan over the years, is waiting for a new influx. This time, the country expects to welcome small and medium-size Japanese companies that feed into the likes of Honda Motor Co. and Matsushita Electric Industrial Co., which have already set up Malaysian factories.

For more high-tech products, the destination is likely to be Taiwan. Hitachi, Canon, NEC, and Fujitsu are looking to Taiwan for new production agreements. The Taiwanese government is predicting $1 billion in original equipment manufacturing (OEM) contracts with Japanese companies this year for products such as motherboards, monitors, and personal computers, a jump of 80% over 1994.

If Japanese factories based in other parts of Asia source too heavily from Japan, their products won't stand a chance against local competitors. The Malaysian auto maker Proton, which boasts Mitsubishi Motors as its equity partner, has just chosen Sweden's Electrolux to produce air bags for its cars. Going with Mitsubishi would have bumped up the price of Proton cars.

Many Asian leaders worry most about how the yen's rise will affect the rest of the world. With the area's economies still counting largely on exports to the industrialized nations, the biggest fear of many officials is that Japan will fall into a triple-dip recession and that growth in the U.S. and Europe will sputter in turn. That would decrease the appetite for Asian goods. Even confident South Koreans such as LG's Kim Young-June might then feel some anxiety about the new world ushered in by endaka.

Asia's Yen Shock


SOUTH KOREA Conglomerates prepare to increase Japanese market share in consumer electronics while decreasing imports from Japan

TAIWAN Computer makers are likely to land more production contracts from Japanese companies and will probably increase their exports to Japan


SOUTHEAST ASIA Higher prices of Japanese components may force companies to raise prices, creating inflationary pressure

CHINA Beijing is strained by a huge burden of yen loans, which Tokyo will not refinance


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