Coping With The Strong Yen

How Japanese exports hang tough

To put it mildly, Japan's trade performance in the first half of the 1990s has defied expectations. After appreciating by some 30% against the dollar from 1985 to 1990, the yen rose an additional 35% or so through 1995--enough, one might think, to cripple Japan's exports and put a huge dent in its trade surplus. Instead, Japanese exports continued to rise, while the trade surplus has shrunk only modestly.

What's behind this performance? Japanese exporters reacted to the threat of a soaring yen, reports economist Thomas Klitgaard of the Federal Reserve Bank of New York, by slashing their export prices in yen terms and cutting profit margins to the bone. From 1990 to 1995, export prices of metals, textiles, chemicals, and electrical machinery declined by 24% to 36%. Although falling costs of imported oil and raw materials helped in the price-cutting drive, so did efforts to lower wages, hold down employment, and boost productivity.

At the same time, notes Klitgaard, many Japanese exporters shifted production from commodity-type goods to high-value quality products, such as luxury cars, which are less sensitive to price increases. And Japanese direct investment in nearby Asia accelerated, as manufacturers capitalized on low-cost labor abroad to turn out goods that had formerly been exported from Japan.

Thus, Japanese exports have benefited in three ways: from price-cutting, from the shift toward producing higher-value items at home, and from the surge in direct investment in Asia, which has fueled strong demand for Japanese machinery and components. Indeed, Japan's merchandise trade surplus with Asia has been running at a $60 billion annual clip.

In sum, although Japan's imports have recently been rising at a rapid rate (particularly from its factories in neighboring nations), Klitgaard notes that its exports are so much larger that its trade surplus is unlikely to shrink very much as long as Japanese exporters continue to find ways to stay competitive.