The United States dollar has been flexing its muscle. Its value on the foreign-exchange market is up about 38 percent against the Japanese yen from its low point in April 1995.
That's just dandy, says the Clinton administration. With an election ahead, it welcomes a "strong" dollar as a sign of good economic policy. It also tends to keep imports relatively cheap, holding down inflation.
But to C. Fred Bergsten, director of the Institute for International Economics, a Washington think tank, the dollar's trend has its drawbacks. He suspects Japan of consciously pushing down the value of the yen against the dollar to stimulate exports.
Japan's economy has been stagnant for a few years, since the end of the "bubble" in prices of real estate and corporate stock. The Japanese government has implemented spending packages to spark business output, and kept short-term interest rates near zero. None of the measures seem to have worked, however. Business activity surged in the spring, but the momentum has apparently died out.
Mr. Bergsten figures the Japanese want to get the yen down to 120 to 130 yen to a dollar, compared with about 112 at present, to produce an export-led recovery.
That, he says, would lead to "huge problems." It would revive the huge Japanese trade surplus globally and with the US. It would renew protectionist sentiments.
Though admitting the term is hard to define, he speaks of "competitive devaluation" - a no-no in world financial circles since the 1930s, when nations attempted to dump their unemployment problems on other nations by keeping their currencies valued so low that exports boomed, creating new jobs.
"Managed devaluation of the yen is the driving force in the currency markets today," says Carl Weinberg, an economist at High Frequency Economics, consultants in Valhalla, N.Y. "It's a beggar-thy-neighbor policy." As in the 1930s, the policy could create jobs in Japan at the expense of its trading partners, he says.
Japan weakens the yen "overtly and covertly," Mr. Weinberg adds. Last week the Bank of Japan was quietly buying US dollars on foreign exchange markets, pushing up the price of dollars. Japan, he notes, could write yen checks for $1 billion dollars a day for a long time. If it did that for a whole year, it would add only 5 percent to the money supply in Japan, providing needed liquidity and cash to the economy.
"This policy kills two birds with one stone" - a weaker yen and extra money in the Japanese economy, Weinberg says.
The "covert" side of the policy includes Japanese administrative actions. The Bank of Japan and the Finance Ministry last month urged importers to accelerate their purchases of dollars, used to buy US goods, before the Sept. 30 midpoint in Japan's fiscal year. And, Weinberg says, the government urged managers of pension funds and other private financial institutions to buy American securities, perhaps even promising that the yen would weaken further. Such US investments offer a yield higher than those made in Japan. If the dollar strengthens against the yen, the value of those investments would be improved further for Japanese investors.
"Why the G-7 didn't get upset about this, I don't know," Weinberg says, referring to the Group of Seven major industrial democracies (which includes Japan).The finance ministers of the G-7 met in Washington last Saturday, prior to the joint annual meeting this week of the International Monetary Fund and the World Bank.
That "failure" to deal with the yen devaluation bothers Bergsten too. "The G-7 isn't even talking about it," he says.
But Robert Solomon, an international economist at the Brookings Institution, a Washington think tank, isn't upset. He sees the rise of the dollar as a recovery from last year's weakness. "I don't think it [the dollar] is all that strong."
Bergsten charges that the leadership provided by the G-7 (US, Japan, Germany, Britain, France, Italy, and Canada) has "declined sharply over the last decade." More coordination of foreign-exchange and economic policies by the G-7 would encourage trade and investment, creating greater prosperity and stability, he says.
Bergsten has long been urging finance ministers to create broad "target zones" of plus or minus 10 percent around agreed midpoints for key exchange rates. Within these zones, currencies could fluctuate in value freely. With such a zone in place, the current upswing of the dollar against the yen would have been braked.
But so far the idea hasn't caught on.