A worried Japanese government has moved to counter the negative impact of the yen's sharp rise in value. Last week, the Bank of Japan, the country's central bank, lowered its key interest rate by 0.5 percent, to 4 percent. It was the second such move to loosen credit and stimulate the domestic economy in little more than a month, bringing Japan's interest rates to their lowest level since 1978.
``If the yen further strengthens in relation to the dollar, it will become more difficult for the Japanese economy to get back on its feet,'' declared Bank of Japan governor Satoshi Sumita last week.
The lowering of the interest rate, he explained, ``will help prevent excessive fluctuations in exchange rates, strengthen the growth in domestic demand, and contribute to further adjustment of the external trade imbalance.''
The Japanese decision, linked to similar moves by Western European nations and the United States Federal Reserve, occurs against a backdrop of rapid changes in the yen's value.
Since last September, when Western finance ministers decided to coordinate an effort to realign currencies, the yen has risen about 30 percent in value relative to the dollar.
The aim of the currency revaluation was to reverse the huge US trade deficit. A cheaper dollar makes US exports less expensive and Japanese exports more costly. When the September decision was made, Japanese officials, along with other participants, envisioned an orderly, moderately paced realignment of the dollar with the other major currencies.
Instead, the dollar has fallen quickly, particularly against the yen. Export-dependent Japanese industries are feeling the impact, fueling fears of a serious economic slowdown.
In recent weeks, the Japanese government has responded by declaring that the yen's value had risen enough and has enacted emergency measures to assist beleaguered export industries. The actions have prompted calls by US trade officials for further reductions in the dollar's value and protests against alleged violations of international rules against subsidizing exports.
The yen's rapid rise affects all exporters, including Japanese auto companies which are raising the prices of cars sold in the US. But the hardest-hit are small- and medium-size companies and manufacturers of low-tech export goods, such as kitchenware, ceramics, textiles, and toys.
The yen's upturn forces these firms to raise the prices of their goods or take a loss on contracts already signed in dollar terms. The uncertainty surrounding the yen's future value, plus tough competition from cheaper products made in some other Asian countries, have resulted in the suspension of many new orders from abroad.
The plight of those affected has been loudly represented in the halls of the Japanese Diet (parliament). Not unlike their counterparts in the US, Japanese members of parliament demand that the government help those hurt by its decisions. Large-scale export-related industries also complain that the yen has risen too much.
The government responded by rushing through special legislation providing low-interest loans, tax breaks, and other aid to ease the plight of small- and medium-size industry. It will now provide 300 billion yen (about $1.6 billion) in subsidized low-interest loans. The potential recipients, officials of the Ministry of International Trade and Industry (MITI) say, have a total sales turnover of $100 billion, 20 percent of which comes from exports.
US trade representative Clayton Yeutter immediately reacted to the loan program, charging that it violated the code of the General Agreement on Tariffs and Trade against export subsidies.
The issue was a major subject of discussion during sub-Cabinet-level economic talks between US and Japanese officials held here last week. US officials told the Japanese that they wanted ``assurances that these loans would not be used for export purposes.''
There is a clear suspicion on the part of US officials -- and in Congress -- that the Japanese are unwilling to ``pay the cost'' of the yen's realignment. The worry is that Japan will thwart the intended impact on Japan's $50 billion trade surplus with the US, which has so far not shown any signs of decline.
The Japanese economic officials responded with a document explaining their contention, as Trade Minister Michio Watanabe put it recently, that the law ``contains absolutely no export-promoting intent.'' According to MITI officials, their aim is to help industries adjust to the speed of the yen's increase. ``There should be some safety net to give them breathing space to adapt themselves to the new situation,'' a MITI official asserted.
US officials here admit that it is hard to ``draw the line'' between objectionable export subsidies and ``adjustment assistance'' which is not objectionable. But, adds one official, ``the obligation is on Japan to demonstrate that it's not going to help companies export.'' While MITI officials argue that they are trying to encourage firms to shift from exports to domestic sales, they acknowledge that the loans could be used to convert to new export business.
There are even deeper doubts among critics of Japan's policies regarding the country's readiness to become less dependent on an export-driven economy. Such critics point to recent statements, such as one made by the auto industry calling for an exchange rate of 200 yen to the dollar, more than 20 yen below current levels.
At that rate, it is believed, exports would still be very profitable, particularly with the helpful impact of cheaper oil and other raw-materials imports.
Some US economists believe that the yen will have to rise much more before it will have an impact on the trade balance.
The confusion and controversy surrounding the unstable currency market is likely to mount. The coordinated drop in interest rates last week is, however, some evidence that the industrial nations are continuing to maintain a degree of cooperation that will be essential in the months ahead.