Trade anxiety in land of the rising yen
Tokyo — History shows us that as a country develops to the point of assuming a dominant role in the world economy, the composition of its balance of payments changes. Great Britain had large payments surpluses until the 1930s, and America's surpluses continued into the 1960s. The 1970s saw Japan's international payments move solidly into the black. That is how Japan's powerful Ministry of International Trade and Industry (MITI) sees the world in its 1986 White Paper on International Trade, which it released last week.
But that is also the kind of statement that, no matter how true it may be, confirms the suspicions of much of the rest of the industrial world that Japan does indeed aim at ``dominating'' the world economy.
The word is right there in the report.
``Why do they have to say that?'' asked a slightly vexed official with another branch of the Japanese government after he was told of the statement in the MITI white paper.
Most Japanese bankers, economists, and government officials contend that, MITI's bold pronouncement notwithstanding, Japan's role as a world economic leader was thrust upon it almost by default as a result of policies enacted on the other side of the world. Specifically: policies enacted in Washington in the first term of the Reagan administration.
As Takashi Ohta, the executive director of the Bank of Japan, this nation's central bank, put it in an interview with the Monitor last week, it was the Reagan administration's ``strong-dollar, strong-America'' goal that set in motion a chain of events that vastly expanded Japan's exports to the United States and led to the huge trade surpluses that have kindled such controversy in Congress and in US business and labor circles today.
Still, Mr. Ohta and other government officials say they do recognize that whatever the genesis of the strong-dollar, weak-yen era, the result was that international trade got out of whack.
There was the hurried attempt to rebalance the system last fall, when the Group of Five (G-5) industrial nations (the US, Britain, France, West Germany, and Japan) set out to devalue the US dollar. Differences in life styles noted
Since then, the dollar has fallen some 35 percent against the yen, driving up the prices of Japanese goods in the US and, in theory at least, making US goods cheaper in Japan, thereby reducing the US trade deficit with Japan. Still, for the moment, the trade deficit is actually worsening, because while Japan's export volume is falling, the value of its exports is rising.
Mr. Ohta and other Japanese officials say they support the dollar devaluation, as wrenching for its economy as it may be. And they praise Treasury Secretary James Baker III for leading the US back to the kind of international policy coordination that was largely neglected when Donald Regan headed the Treasury in Reagan's first term.
But Japanese officials still complain that the US seems to want things to change overnight -- to reverse the effects of four years of strong dollar in only nine months.
Such quick change is extremely disruptive for Japan. One hears predictions of deindustrialization, bankruptcies, recession, and, possibly, of resentment of the US building up among Japanese workers.
That would, of course, be the mirror image of what happened to much of US basic industry in the early '80s as it lost out to the Japanese and as ``Japan-bashing'' came into vogue.
``Yes, we are rich today,'' says a Harvard-educated government official, speaking off the record. ``But the average Japanese does not feel very rich. He lives in what is often called a rabbit warren. There is not much difference in how an office worker lives and a laborer.''
His message is that, while Japanese companies may be wealthy and Japanese workers may have large amounts of personal savings, when compared with the trappings and comforts that most Americans enjoy the Japanese life style is quite a way behind.
And tougher times loom ahead.
``To be very honest, at 242 yen to the dollar,'' Mr. Ohta concedes, ``everybody was smiling.''
But that level was last seen Sept. 20, two days before the G-5 meeting.
``At 200 yen, everybody was still comfortable,'' he continues.
``And at 180, it was still OK. But at 160, everybody was crying. I mean really crying.'' Impact of the strong currency weighed
Central banker Ohta says the road down to 180 was ``man made'' by G-5, but between 180 and 160, market forces and such events as falling oil prices took over.
Since late May, rates have climbed somewhat, but only to between 165 and 170. And the devalued dollar has begun to work its magic -- or do its damage, according to your perspective.
Japanese goods are fast becoming pricey in the US. Toyota, Honda, Mazda, and many other companies have upped their US prices four or five times since the first of the year because of the 35 percent rise in the yen.
And almost every day another Japanese company announces plans to open production facilities in the US. And unlike previously, this is not simply a move to placate US protectionists -- although that is still an important consideration. The US labor costs, coupled with transportation savings, increasingly make direct investment in the US economically sensible.
``The main purpose of direct Japanese investment had been job creation,'' admits Kazuo Nukazawa in the financial affairs department of the Keidanren, Japan's powerful business federation. ``But now with the exchange-rate change, it's more economical'' to build plants in the US.
In fiscal '84-85 (from April 1 to March 31), he says, Japanese direct investment in the US amounted to $3.4 billion. It rose some 60 percent, to $5.4 billion, in fiscal '85-86. That was 44 percent of Japanese direct investment in all countries.
Mr. Nukazawa estimates the direct investment in the US could exceed $6 billion to $7 billion by next April -- ``but it can't keep going up at 60 percent a year.''
At the same time, Japanese portfolio investment (stocks, bonds, and other financial instruments) in the US has been a rather steady $50 billion to $55 billion in those years.
Nukazawa characterizes local governments in the US as ``very, very receptive'' to the idea of Japanese plants being sited in their regions, and he says some 40 state governors have visited Japan to court Japanese investment in the past several years. Dollar seen as bellwether
But despite that pilgrimage of Americans to this newly wealthy country, it is still surprising to see how very much Japan sets its course depending on what happens in the US. It's not just in brand names and consumer tastes that the two economies are linked. And MITI's world view aside, the US still seems to dominate the economic relationship.
Few Americans other than those who travel to or do business with (or compete against) Japan can quote you the current yen-dollar rate. But in Japan it is a front-page item in daily newspapers. It is a key signal for businessmen, bankers, and investors.
Most Japanese business decisions have to be made on the standard basis of return on investment and on the probable course of exchange rates. The dollar is this nation's economic bellwether. Volatile exchange rates are a nightmare for economic planners.
When a key US policymaker talks about exchange rates or about such related factors as international interest rates, the Japanese are all ears. It gets confusing, however, when, as in recent days, Mr. Baker says the exchange rate is about right, but US Trade Representative Clayton Yeutter says the yen could stand to get still stronger.
Nukazawa calls it ``impolite'' for officials of another country to ``talk up the value of the yen.''
At this writing, one dollar equaled around 165 yen. That is up from the crying level, but it is still low enough that Japan's government and industry are bracing for deep and lasting economic change. New direction ahead
Sources within Japan's Economic Planning Agency told the Kyodo News Service last week that sluggish economic indicators such as capital spending, personal consumption, and housing construction could portend a full-fledged recession in Japan in the second half of this year.
The government, meanwhile, is trying to turn this industrial battleship in the water without causing it to capsize. It is readying measures to stimulate domestic demand and absorb some of the huge savings the Japanese have built up as a result of the record trade surpluses, not just with the US but with the European Community, Latin America, and much of Asia, including a rapidly growing surplus with China.
Moreover, officials of MITI, the Foreign Ministry, the Bank of Japan, and the Keidanren concede that diplomacy and politics play a big part in Japan's economic metamorphosis. In virtually every conversation on the subject, the terms one hears are ``reduce trade friction'' and ``promote international harmony.''
As the new MITI report notes: ``It will be a matter of serious concern . . . if Japan's surpluses should grow any larger than they are now. Not only would that impede the solution of individual friction issues, it could shake world confidence in free trade to the extent that it would be impossible to sustain the free-trade system.''
Notes Mr. Nukazawa at the Keidanren: ``People are worried about protectionism.'' He refers specifically to the omnibus trade bill passed by the US House of Representatives in late May.
And as if to assure Americans that the balance sheet -- not Japan-first thinking -- drives business decisions here, Nukazawa adds: ``Japanese industry now will go to New York or London. It doesn't care about this market. It will go where there is the highest return on its surplus dollars.''