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Breaking the yen barrier

May 25, 1984



THE tentative new financial accord between the United States and Japan is an important step toward ensuring a continuing - and expanding - global trade. The pact will benefit most Western industrial nations - although it should prove particularly helpful to the US, which maintains a large trade in consumer goods with Japan.

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It is hardly surprising that the pact comes now - just as the Western industrial nations prepare for the coming London economic summit. Japan, for its part, would obviously like to mute widespread criticism about its export policies - just as the US would like to expand its export trade in general at a time when the high value of the dollar makes US goods expensive vis-a-vis products from other nations, including Japan.

By itself, the tentative new pact could not seem more mundane for the layman. But its importance should not be missed. Technically, it does two things: It opens up the Japanese capital market to foreign investors - allowing US and European financial institutions to conduct additional business in Japan, just as Japanese financial institutions do in the US and Europe. And second, it expands the role of the Japanese yen in international financial affairs by making it easier for foreigners to acquire and invest in the yen.

At present, Japan zealously protects the yen against heavy use abroad as a ''reserve'' currency, in the way the US dollar is now used as a reserve currency. Japan purchases almost all its imports with dollars, holding outflows of the yen to a minimum. One result: Less than 4 percent of all financial reserves held by Western governments are in yen. West German marks account for about 12 percent of all reserves. Dollars account for almost all the rest.

The upshot of this policy has been to undervalue the yen in comparison with other currencies, thus making Japanese exports cheaper. And that helps explain why Japan is expected to enjoy a total trade surplus with other nations of $31 billion this year, up from $23 billion in 1983. The US, meantime, continues to post record trade deficits. Earlier this month, Washington announced that the trade deficit for the first three months of this year - driven by the soaring value of the dollar - reached $26 billion, up from $19 billion for the previous quarter. During 1983 alone, the US total trade deficit (for merchandise, excluding trade in services) was $61 billion.

Obviously, the US must do everything it can to stem its trade imbalance - which works against manufacturing jobs at home. The tentative agreement on the yen should help ease that imbalance by making Japanese goods somewhat more expensive in global commerce.