How Japan Talked Up The Yen
For the better part of a month, the strengthening dollar had become an increasing sore spot for politicos in Washington and Tokyo. Subtle jawboning did nothing to ease the dollar down. Even a joint statement by the finance ministers of the Group of Seven industrial nations, intended to dampen the greenback, had little effect. On foreign exchange markets, traders kept buying dollars, assuming the bull run would extend into the summer.
Then, on May 9, the buck finally budged, dropping to 120 yen from 124. It fell to 118 when traders returned from the weekend, and was at 117 on May 14. Suddenly, the months-long course had reversed, and it was time to sell dollars and buy yen. Says Michael R. Rosenberg, director of international fixed-income research at Merrill Lynch & Co. in New York: "All the big players tried to get out the door at the same time."
MEET "MR. YEN." Who moved the markets? Not Treasury Secretary Robert E. Rubin. Not the G-7. Credit instead Eisuke Sakakibara, a little-known Japanese financial bureaucrat. In the currency trading pits, Sakakibara already had earned the moniker "Mr. Yen." His fame began with his deft coordination of a global rescue of the dollar after it collapsed to a record-low 79.8 yen in 1995. Now, Sakakibara, director-general of the Finance Ministry's International Finance Bureau, is winning wider acclaim for talking the dollar down before escalating Japanese trade surpluses could trigger a backlash in Washington.
The yen's comeback is the work of more than one man's maneuvers, of course. It is also a sign that Japan's economy finally is reemerging from five years of stagnation. Amid reports of surging corporate earnings--in many cases boosted by earnings generated in the U.S.--and healthier consumer demand, analysts expect Japanese gross domestic product to grow by 2% this year and 3% in 1998. Government bond yields have begun climbing, and the long dormant Nikkei stock average has scored a surprising 8.5% advance in only two weeks.
Despite signs of an economic turnaround, though, the yen continued to trade at a huge discount to the dollar, giving Japanese exporters an edge in the U.S.--and some U.S. executives fits. "We've said for more than a year that the yen was too weak," says Ford Motor Chairman Alexander J. Trotman. While Detroit fumed, alarm bells were sounding in Washington. With Prime Minister Ryutaro Hashimoto cutting spending and raising taxes to rein in a ballooning budget deficit, it looked as though Japan might have to rely exclusively on export-led growth to get itself through 1997.
Secretary of State Madeline K. Albright and Vice-President Al Gore, among other U.S. officials, started quietly warning Japan to do more to stimulate demand at home. Then, in a visit to Tokyo in early April, Rubin privately raised questions with Hashimoto and Finance Minister Hiroshi Mitsuzuka about the dangers of Japan's mushrooming exports, which reached $380 billion in the fiscal year ended Mar. 31.
WARNINGS. Sakakibara took the hint and began wielding his arsenal of bureaucratic tactics. First he suggested publicly that the outpouring of Japanese capital abroad--$100 billion in the latest fiscal year--might not continue at its current pace. Then he warned that the Bank of Japan's historically low interest rates might inch up. He next alerted Japanese investors that currency swings might wipe out overseas profits. And in unusually blunt terms, he went before the Diet to proclaim that the greenback could easily fall back to 103 yen.
To cap it all off, the Finance Ministry trotted out an investment manager from Japan's $2 trillion postal savings system to say foreign bonds might be a risky bet if the dollar started to swoon. "What fund manager could buck that?" asks Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, N.Y. "Only the brave and foolish."
By May 9, the fix was in and the dollar on the run. The burning question now is whether Sakakibara's recalibration of currencies actually will head off trade tensions. Some indicators suggest it may. The stronger yen is sure to encourage Japanese manufacturers to continue investing in the U.S. and other countries to reduce their costs. And at 118 to the dollar, Japa-nese auto makers still suffer a $900 price disadvantage against America's Big Three on the average small car they export to the U.S., estimates Wexford Management Consultants in Merion, Pa.
Japan's rebound can proceed, economists figure, even if the yen strengthens to 100 to the dollar. Some economists believe that the Bank of Japan will raise its near-zero interest rates 25 basis points later this year and another 25 in 1998. In advance of that expected hike, the prestigious Industrial Bank of Japan Ltd. on May 13 boosted its long-term prime lending rate from 2.5% to 3%, making it the first such hike in a year.
DETROIT GRUMBLINGS. In the near term, the rise in the yen and in Japa-nese rates could cause the Clinton Administration some pain. Japanese imports, which totaled $114 billion last year, will cost Americans more. And higher interest rates in Japan will put more downward pressure on the dollar--another inflationary force. That could push the Federal Reserve to raise interest rates at its next Federal Open Market Committee meeting on May 20.
Auto makers aren't appeased yet. Detroit howled when Japanese carmakers picked up 1.9 percentage points of U.S. market share in the first four months of this year. Now, "we still believe 100 to 110 yen to the dollar is the appropriate range," says Trotman of Ford Motor Co. Andrew H. Card Jr., president of the American Automobile Manufacturers Assn., even suggests that the buck should fall as low as 95 yen to get Detroit back on a better footing.
That might be a bit much. But because of cost-cutting and overseas expansion, Japanese auto executives say they can live with a rebound in the yen. Toyota Motor Chairman Shoichiro Toyoda, for one, feels that a dollar worth 110 to 120 yen is "appropriate for our company." And Shigeki Hayashi, Honda Motor Co.'s assistant finance manager, insists that "no matter how much the yen fluctuates, we will not change our long-term plans."
Talk like that will keep the U.S. on guard--although for now, the Clinton Administration is remaining mum on the yen's rebound, perhaps fearful of touching off a broader dollar decline. In the policymakers' never-ending game of cat-and-mouse with currency traders, Sakakibara has won a critical round, and probably avoided a transpacific shouting match. But he will need all the jawboning skills he can muster if his tactics don't do anything to slow the Japanese export juggernaut.
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