Japan's Fallout Over Trade Knocks Confidence in Economic Recovery

THE Japanese yen stayed strong against the United States dollar in Tokyo yesterday, as fallout continued from last Friday's trade summit between Prime Minister Morihiro Hosokawa and President Clinton. The two leaders' failure to conclude a bilateral trade agreement has cast a pall over Japan's incipient economic recovery.

Successful passage of political reform bills and cabinet approval of the 1994 budget boosted investor confidence through early February. The Tokyo Stock Exchange's Nikkei Index climbed back above the 20,000 level for the first time since last October. Last week, the Economic Planning Agency forecast 2.4 percent growth in real gross domestic product for fiscal year 1994.

With Mr. Hosokawa and Foreign Minister Tsutomu Hata in Washington to finalize trade agreements with the US, economic indicators were looking positive on Friday. But failure to conclude a US-Japan trade accord sent foreign exchange dealers back to their computer screens to face the specter of a trade war.

On Tuesday, the yen closed at 102.02 to the dollar, up 3.67 yen from Monday, and more than 8 yen from its pre-summit benchmark. Tuesday's rate was the dollar's lowest mark since the endaka (strong yen) crisis of August 1993. Only massive dollar-buying by the Bank of Japan drew the yen lower after touching 101.90 early in the morning.

The bank was active again in yesterday's quieter trading in Tokyo. The dollar closed up 1.13 at 103.15 yen, with the bank reportedly intervening but unable to tip the dollar above 104 yen.

Many dealers say the yen will resume its climb as Trade Representative Mickey Kantor and Laura D'Andrea Tyson, head of the Council of Economic Advisers, keep talking tough on Japan's $60 billion trade surplus with the US. On Tuesday, Mr. Kantor threatened to apply sanctions to imports of Japanese cellular phones.

Back in Japan, Hosokawa played down the dispute, insisting that he and Mr. Clinton had agreed to find ways to resolve the issue after a ``cooling off period.''

In Japan's lower house today, Hosokawa said Japan would take ``appropriate steps to stabilize the foreign exchange market.'' Finance Minister Hirohisa Fujii earlier told reporters that Japanese monetary authorities would step in to support the yen if necessary. Blaming speculation for the latest bout of endaka, Mr. Fujii said the yen should reflect Japanese economic fundamentals. ``Sharp movement in the yen will hurt the global economy,'' he said.

But Fujii has not sought coordination with other members of the Group of Seven industrial democracies, and Dr. Tyson commented that the appreciation is due only to the yen's strength, not to weakness in other currencies.

Japanese business leaders have accepted the failure to reach a trade agreement as inevitable. Takeshi Nagano, president of the Federation of Japanese Employers' Association, urged negotiators to keep dialogue going, bearing in mind the importance of bilateral trade ties.

Popular consensus in Japan is that Hosokawa acted correctly in rejecting US demands for numerical trade targets. But there could be some corporate upset if, as market watchers expect, the dollar further tests its downside against the yen. Last year's endaka crisis cut deeply into Japanese corporate profits, especially among export-oriented auto and electronic manufacturers.

With the exchange rate hovering around 110 yen to $1 in January, Japan's nine major auto companies issued uniformly upbeat profit forecasts for 1994. Already the forecasts are being revised down. ``There is a better than even chance that the dollar will touch 100 yen,'' says Alan Livsey, a strategist at Kleinwort Benson International in Tokyo. At that point, the Bank of Japan would intervene by buying dollars and possibly cutting interest rates to keep the dollar within its 100-120 trading band, he says.

Tetsuhiro Toomata, chief trader at the Long-Term Credit Bank of Japan in Tokyo, anticipates that the dollar will drop below 100 yen within the next month. But Mr. Toomata does not expect the Bank of Japan to cut interest rates unless the stock market index falls below 17,000.

Yesterday, the Nikkei index closed at 19,052.11, up 77.51 from Tuesday. ``Stimulating domestic consumption is the best means to stop the yen's appreciation,'' Toomata says.