So far, so good. That is what Bank of Japan sources are saying about the yen's rise and the dollar's fall since the finance ministers of the world's five richest countries met in New York two weeks ago.
The five ministers have been meeting again in Seoul, this time for the annual conference of the International Monetary Fund and the World Bank. (Britain, France, West Germany, the United States, and Japan constitute the ``G-5.'')
They have reaffirmed their Sept. 22 commitment to take concerted action to bring the dollar down. Although they have announced no specific steps to be taken, they are believed to have promised one another further action to tackle the fundamental causes of the overvalued dollar and the undervalued yen.
The US, for instance, is expected to work harder to reduce its budget deficit, while Japan is planning to attract more imports by increasing domestic demand.
As of Monday the dollar stood at 215.70 to the yen, 4 yen higher than at the weekend and reflecting the market's disappointment at the lack of more detailed information from Seoul. Bank of Japan sources, however, remain determined to bring the dollar down further.
Satoshi Sumita, governor of the Bank of Japan, has said publicly that the dollar is still too high and that he would like to see an exchange rate closer to 200 yen to the dollar.
Banking circles here say the next barrier to be passed will be the 210-to-the-dollar level. West European currencies have also strengthened against the dollar, but what happens to the yen in the next couple of weeks will really test the effectiveness of the G-5 efforts. For it is the $37 billion trade deficit with Japan, a deficit expected to grow to $50 billion this year, that has focused congressional ire on Japan and fueled a spate of protectionist bills on Capitol Hill.
That is why, despite the pain caused to Japan's export industries, Tokyo financial authorities are determined to bring the dollar down still further.
``It's difficult to say whether the level we want to achieve should be 200 to the dollar, or 205, or any other figure,'' one Bank of Japan source said. ``It will take a year for the higher yen to have any real effect on the terms of trade. But meanwhile the market must be convinced that the dollar-yen exchange rate we have achieved is reasonable. Otherwise, such enormous pressures against the yen will arise that nothing we can do can stem the tide.''
For instance, the source said, long-term US interest rates are still five points higher than in Japan. Thus many Japanese corporate treasurers find it advantageous to buy long-term US bonds.
As long as the market believes central banks are intervening in the right way, it will remain fairly passive, one analyst says. But even central bankers cannot keep selling dollars indefinitely, and the question is what the market will do once it believes the intervention has gone too far.
That is why, a Bank of Japan source said, both the US and Japan must give more substance to the pledges they have made each other. Suppose, he went on, President Reagan's November summit with Soviet leader Mikhail Gorbachev goes well. That would lead at least to an expectation of lower defense budgets, which would help reduce the federal deficit. A pledge to hold the line on social security would have a similar effect. A lower federal deficit would mean lower interest rates and make the dollar less attr active to foreign investors.
As for Japan, while many industries say they cannot export profitably at less than 220 to the dollar, this source believes that they can withstand a 200-to-the-dollar rate. Imports would become cheaper at that rate, and consumption would rise.
But just as in the US, in Japan every change of law or procedure affects some existing interest group. The powerful Ministry of Finance, for instance, is reluctant to cut taxes at a time when its top priority is reducing the government deficit.
Similar conflicts exist within all the G-5 countries, as well as between them. When the action to be taken is in a fairly limited field such as the manipulation of exchange rates on a short-term basis, spectacular results can follow.
But now comes the more complex task of concerting policy in areas that touch political sensitivities in all five countries. The G-5 meeting showed that the finance ministers, although aware of the difficulties, are determined to keep up their united front.