Europe's yen market an arena for US-Japanese financial tilting

Japanese authorities are trying to slow a push by the United States - aided by internal allies here - to liberalize the Japanese financial market. The long-running battle by the US to reduce its alarming trade deficit with Japan has turned in the direction of reducing the Japanese advantage of a protected, undervalued currency. By internationalizing the local financial market, Washington argues, the yen would be exposed to free-market forces that make artificial control impossible.

The focus at present is on the ''Euro-yen market.'' Issuance of yen-denominated bonds in the Eurocurrency market has so far been allowed only to a small number of foreign governments and international organizations under Japan's policy of limiting the free flow of the yen in and out of the country. Since they were first permitted in 1977, there have only been 25 such issues worth a total of 385 billion yen ($1.72 billion).

Last November, during his visit to Tokyo, President Reagan obtained a Japanese promise to begin deregulation by allowing some Japanese private enterprises access to Euro-yen bonds. Washington has been keeping up the pressure ever since. The latest salvo was fired by Treasury Secretary Donald Regan on a Tokyo visit in mid-March when he expressed American frustrations at lack of Japanese action in remarkably strong terms.

In response, Prime Minister Yasuhiro Nakasone has told the Finance Ministry to produce a detailed package of capital market liberalization measures ready for presentation to the US in mid-April. ''(He) told us to take drastic action, '' Deputy Finance Minister Tomomitsu Oba told reporters after meeting Mr. Nakasone. The top priority, Nakasone ordered, should go to Euro-yen decontrol.

The issue, as both Americans and Japanese readily appreciate, is crucial: Many experts feel it could trigger a full-scale financial revolution in this country - one the authorities would have great difficulty controlling.

First, the interest rate on Euro-yen bonds, along with others on the Eurocurrency market, is much less than that prevailing in Japan. Second, bond issuance is cheaper, particularly because companies do not have to put up expensive collateral, as most of them are required to do in Japan. It would be contradictory if different criteria prevailed at home and abroad, and most experts feel that inevitably the Japanese market would be the one that had to conform.

To try to avoid the inevitable rush to Europe and the probable disruption of the domestic bond market, the Finance Ministry has been seeking to maintain some control by new regulatory measures limiting the number of qualified companies. Under existing criteria only the 25 top-rated companies would be allowed to issue Euro-yen bonds, but the ministry is reportedly considering expanding this to about 90 - still far short of what the US would like.

Even this limited concession has provoked a squabble between banks and securities firms. The banks bitterly oppose regulation, believing it would reduce their loan business, while stockbrokers side with the US in welcoming a move that would expand their underwriting business.

Heeding the American demand, Bank of Tokyo adviser Ichiro Takeuchi says, ''will create serious cracks in the entire Japanese financial structure,'' further speeding up liberalization of interest rates that would revolutionize financial dealings here.

Another weapon for breaching the Japanese defenses is also being readied: pushing the concept of a yen-denominated bankers' acceptance market - a short-term money market mainly used in trade. This, too, would have the effect of forcing the yen to become an international currency like the dollar, probably leading to its substantial appreciation.

Here, ironically, the US has a powerful ally in the Japanese Ministry of International Trade and Industry (MITI), which last July first proposed early establishment of a bankers' acceptance market to promote yen-based transactions.

Japan's yen-based trade deals account for some 40 percent of exports but only 2 to 3 percent of imports, MITI pointed out. In contrast, 98 percent of America's exports and 85 percent of its imports are based on its own currency. To facilitate the yen's internationalization, MITI officials insist, it is necessary to have a system under which foreign traders can freely procure and invest yen funds.

But the Finance Ministry and central bank are reportedly concerned that a free-for-all bankers' acceptance market, where interest rates on trade bills are decided by market forces, would accelerate the deregulation of interest rates and further increase the momentum of overall financial liberalization at a chaotic pace.

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