Land of the Rising Yen

By Janice Castro.

Little more than a year ago, Japanese companies seemed invincible in the American market. Because the dollar was so strong, Japanese products were relatively inexpensive in the U.S., and Americans seemed to have an insatiable appetite for Toyotas, Sonys and Nikons. But now that the dollar is diving, the prices of Japan's goods are suddenly on the rise in the U.S. As the dollar hit a record postwar low of 174.60 yen last week, Japanese manufacturers fretted that their exports would be devastated, and rival American businessmen broke into broad smiles.

In Tokyo, Prime Minister Yasuhiro Nakasone urged his Cabinet to devise emergency measures to aid the worst-hit Japanese firms and pledged to do more to calm down the dollar-yen exchange rate. On the following day, the Bank of Japan briefly intervened in the foreign-exchange markets, buying dollars to support the value of the U.S. currency. But no one could be sure that the bank would succeed, and a sense of helplessness came over many Japanese executives. Said an official of NEC, a leading Japanese electronics manufacturer: "It is like groping our way in the dark. All we want now is for the exchange rate to stabilize."

That may not happen for a while. The dollar has been falling partly because of the meeting last September of the finance ministers and central bankers of Japan, Britain, West Germany, France and the U.S. The officials agreed to help the U.S. reduce the value of its currency in an effort to trim the dangerously high American trade deficit, which hit a record $148.5 billion last year. These industrial powers, known as the Group of Five, were convinced that bringing the dollar down could help avert a trade war. At the time, the U.S. Congress was particularly incensed about America's $50 billion deficit with Japan.

The Group of Five plan was a success: the dollar has fallen against all major currencies since the September meeting. Most important, it has declined by 27% against the yen, and the protectionist pressures in Congress have declined. But the Group of Five now seems to be in no hurry to stop what it started. The central banks, with the exception of the Bank of Japan, are making no attempt to discourage private foreign-exchange traders from continuing to push the dollar down.

That means mounting trouble for Japanese companies that depend upon export sales, since they must charge customers more dollars to receive the same number of yen. In a report last week, the Japanese Ministry of International Trade and Industry revealed that manufacturers of cars, computers, semiconductors, cameras, color television sets and videocassette recorders were planning to raise prices further in the U.S., adding to recent increases. Toyota, the largest Japanese automaker, has marked up its price tags by an average of 7% since the beginning of the year. A Toyota Cressida now costs $17,480, up 11.4% from $15,690. In the same period, the price of a Honda Accord LX has increased by 17%, to $12,469. Last week Nissan Motor U.S.A. announced price hikes of about 3% on some of its 1986 cars and trucks.

Car dealers in the U.S. who until a few months ago routinely added premiums to popular Japanese models are now beginning to encounter customer resistance. Says David Grasemere, a New Milford, Conn., Volkswagen dealer: "Japanese dealers may soon have to start offering incentives to sell their higher-priced cars." As the balance of competitive power between Japanese and American automakers appeared to be shifting last week, shares of General Motors, Ford and Chrysler all rose on Wall Street.

While the yen's rise was causing havoc in Tokyo, it was good news for American exporters. Japanese consumers are already taking advantage of bargain prices on American wines, foods and sporting goods. But most U.S. economists agree that the dollar must decline further if U.S. companies are to become fully competitive with their Japanese rivals. "You ain't seen nothing yet," says Rimmer de Vries, the chief international economist for New York's Morgan Guaranty Trust. "Another 20% yen appreciation is absolutely necessary before the U.S. can start to work off its trade deficit with Japan." Some economists think that the dollar must go down to the 100-yen threshold over the next four years.

Not knowing where or when the yen's rise will stop, Japanese companies are trying to cut costs. Some firms are planning to shift production abroad to avoid further exchange-related losses. Victor Co. of Japan will begin producing videocassette tapes in Tuscaloosa, Ala., this fall, and plans to double production of audio equipment at its Singapore plant. Says Darrel Whitten, associate director of research at Bache Securities (Japan) Ltd.: "The strong yen will accelerate this tendency to rely on overseas production, just as the strong dollar helped push American manufacturing and assembly overseas."

The Nakasone government seems prepared at last to stimulate Japan's domestic demand, a step that has long been urged by the other members of the Group of Five. That would reduce the reliance of Japanese companies on exports, since they could sell more products at home. Says Roger Shields, chief international economist for New York's Chemical Bank: "Japan must assume the responsibilities of a major industrial power, and that will require dramatic changes in its economic structures. Japan cannot maintain the attitude that it must export to live."

With reporting by Yukinori Ishikawa/Tokyo and Frederick Ungeheuer/New York