FROM Tokyo discos to Toyota Motors, the latest surge in the yen has sent shivers through the Japanese economy.
A two-year recession has already helped to knock the Liberal Democratic Party from power and has jacked up Japan's trade imbalance with the world. But now, with economic recovery even more distant due to the yen's rise, Japanese export firms are running out of counterstrategies to cope.
"We have brought in new models and made great efforts in marketing, but our profits [still] fell," said Masami Iwasaki, Toyota vice-chairman, on Wednesday. The company's profits went down 26 percent in the year ending June 30.
At the King and Queen club in Tokyo, customers with business expense accounts are now so scarce that managers sell shabu-shabu (boiled beef) on the premises until 10 p.m., and then shed their happi cooking coats for tuxedos to serve the few patrons still dancing.
With the yen selling about 105 to the dollar compared with 125 just six months ago, the fallout from the sharp change is expected to be mixed.
"You cannot say the yen's appreciation is all bad [for corporate profits]," says Takao Komine, a government economist.
But the big impact, as many economists forecast, will be an economic growth rate of only 1 to 1.5 percent this year. That is far below the 3.5 percent growth rate that Japan promised the United States last year to help spur the world economy. Many Japanese companies count on 2.5 percent growth in order to avoid layoffs.
Due in part to Japan's restrictions on imports, the yen's rise could boost the trade surplus to a record $150 billion this year, even though exporters will suffer from a weaker dollar.
Worried about more trade friction with the US, the new prime minister, Morihiro Hosokawa, is expected to come up with new ways to boost the economy before he meets President Clinton in late September.
Washington officials have jawboned the yen up since February to force Japan into taking action about the trade imbalance.
But when the dollar reached parity with the yen (one penny equals one yen) on Aug. 19, the US stepped into currency markets and stopped the slide. The yen's rise, said US Treasury Undersecretary Lawrence Summers, "could retard growth in the Japanese and world economies."
Mr. Hosokawa's proposals, according to Kenneth Courtis, chief economist for Deutsche Bank in Japan, will be a $39 billion to $58 billion tax reduction, an interest rate cut, and long-term deregulation of the economy.
An income tax cut, while popular with business and consumers, is strongly resisted by the Finance Ministry. But, says Chief Cabinet Secretary Masayoshi Takemura, "The ruling parties recognize that if economic conditions worsen further, tax cuts may be necessary."
The nearly 20 percent rise in the currency is expected to bring an estimated $35 billion windfall to importers of raw materials and other goods. Hosokawa wants consumers to benefit by making importers reduce domestic prices.
Slow consumer spending has been a major drag on the economy. Department stores report a 6.2 percent drop in sales over the past year.
For exporters, however, who prefer the yen above 115 to the dollar, a new hunt is underway for ways to streamline. Toyota, for instance, has tried to cut $800 million in costs since February, but the belt-tightening has been all but wiped out by the yen's surge.
A SURVEY of 609 corporations by Asahi Bank found that 95 percent would need to "upset" their business plans, if the yen stayed around 100. Many companies are weighing mergers, layoffs, or taking a government loan. Small manufacturers are contemplating moving production overseas for the first time.
Many big firms have already shed excess workers to their subsidiaries and affiliated companies whose profits have fallen more than the parent company's, a Nikkei newspaper study said.
Auto and electronic firms, which form the mainstay of Japan's economy, plan to slash capital spending for the second year in a row and move more production to Asian nations.
This "hollowing out" of Japan industries by opening factories overseas has led to basic changes in the economy. Earlier this year, for instance, Japan became a net importer of color televisions, which were once a major export.
"Aside from protection from imports, a large number of industries in Japan have been characterized as engaging in practices to limit competition, aided by government regulations that essentially aim for the same purpose," stated a Nikkei editorial. Industries where such regulations exist account for nearly 40 percent of the nation's gross national product, the paper stated.