Low Yen, High Anxiety
It wasn't too long ago that global economy watchers were mesmerized by the unstoppable Japanese yen, which moved ever higher even as Japan's nominal trade surplus seemed to defy economic reality by continuing to grow. Now it's the yen's relentless slide in the wake of a falling surplus that is attracting attention--and stirring anxiety.
Not only is the yen down some 11% against the dollar since the start of the year but it recently touched a 42-month low that brought it 30% below its peak value last April (chart). The big fear in many nations is that the yen's dramatic turnaround is putting Japanese companies in a position to win back share in global markets and reverse the progress made in cutting Japan's huge trade imbalance down to size.
Economist Joseph P. Quinlan of Dean Witter Reynolds Inc. points out that Japanese companies have restructured their operations to be profitable at an exchange rate of 95 to 100 yen to the dollar. With the yen currently trading about 14% below that range, "they have tremendous flexibility to employ aggressive pricing tactics in both the U.S. and Asia," he warns.
Among the potential casualties are U.S. auto makers, which have begun sounding off to government officials about the apparent efforts by Japanese authorities to weaken the yen (BW-Nov. 11). Aided by price cuts, imports of motor vehicles from Japan have been picking up steam, while exports of U.S.-made cars to Japan have stalled after rising rapidly in 1994 and 1995. Also at risk are U.S. computer companies, which are facing a wave of cut-rate new models and products from Japan this year.
The yen's decline may have already exacted a heavy penalty on Asian exporters of electronic goods, computers, steel, and other products. In past years, the strong yen gave a big leg up to such producers by undercutting Japanese competitiveness. But now that advantage is fast evaporating. "Developing Asia's sharp slowdown in export growth this year is due in large part to a weaker yen," says Quinlan.
The ultimate danger is that a weak yen could undermine Japan's commitment to continue to pursue deregulation and widespread structural reforms. And it could inspire Japanese manufacturers to cut back on their foreign direct-investment programs--which have been a key ingredient in the economic emergence of developing Asia over the past decade.
"If that were to happen and Japan's trade surplus took off again," warns Quinlan, "we would be back to square one--bitter wrangling with the Japanese over trade policy and threats of retaliation, not only by the U.S. but by Japan's other trading partners."
At least one economist, Robert J. Barbera of Hoenig & Co., thinks such risks are exaggerated because "currency-market vigilantes would quickly push the yen higher if Japan's trade surplus began to grow again." He may well be right. But until the yen stabilizes and regains some ground, a lot of Japan's competitors and trading partners will be suffering some sleepless nights.