Japan is no longer land of rising yen
The Japanese economy is ailing, and neither the politicians nor monetary authorities seem able to find a cure for the underlying problem. Tokyo financial experts have serious doubts about the effectiveness of a plan announced on March 2 to defend the yen through joint efforts by Japan and the United States. At best, the plan is seen as a means of gaining time while Japanese officials work to come up with something better.
After rising to a high of 176 yen to the dollar, the Japanese currency has tumbled in a few months to a level of around 250.
"You should say the dollar is strong, rather than the yen is weak," says Bank of Japan governor Haruo Maekawa. "And the reason why the dollar is strong, despite the unfavorable international balance of payments, is that American interest rates are so high."
Whatever the underlying reason, the yen's sudden decline has set off a chain reaction in the Japanese economy. The import bill has soaed, particularly the price of oil. Inflation has broken loose and, after several years in which the Japanese have kept it down to around 4 or 5 percent annually, the rate is currently 6.6 percent, but could soon move into double figures again.
his has accelerated the yen's decline, despite a valiant rearguard action by the Bank of Japan, setting off a vicious circle that no one seems to know how to break out of for the time being.
Monetary experts say the key reason for the yen's low value is the growing balance-of-payments deficit. The Bank of Japan thought the worst would be over by now. But, in fact, the opposite is happening. It increased steadily in every quarter of last year, and with a predicted deficit of $5.3 billion in the January-to-March quarter, the final figure for fiscal 1979 is likely to be much higher than the projected $11.3 billion.
In fact, some banks are saying the January-to-March figure has been badly under-estimated, perhaps by as much as 50 percent.
Oil is the main problem. The yen's lower value makes it much more expensive: Every 10 ponts of decline is reckoned to add $2 billion to the payments deficit. Imported oil is expected to cost Japan some $45 to $50 billion this year.
Japan slashed imports this January by 16 percent as compared to a year ago, but the value jumped twofold. Total import volume last year declined 7 percent, but value increased 80 percent.
Experts at the Mitsubishi Bank predict the fiscal 1980 payments deficit could be as high as $19 billion -- ironically about the best level Japan achieved in the heady days of economic stardom that now seem to be a distant memory, though they only edned two years ago. A continuing yen depreciation also raises the prospect that Japanese exports will increase rapidly, leading to a fresh round of trade friction with the United States and Western Europe. In fact, Trade Minister Yoshitake Sasaki recently urged a conference of trading firm executives to "get out there and export."
Domestically, the yen's decline has frightening implications. Wholesale prices are running over 20 percent above year-ago levels. This is now funneling down to the consumer price index. In February, the Tokyo CPI rose 7.6 percent over the same month last year.
There are major price increases in the pipeline. Following a recent 25 percent boost in rail fares, gas and power charges will rise approximately 50 percent in April, and during the rest of the year large increases are scheduled in rice and wheat resale, air fares, public school charges, mail rates, medical insurance premiums, and domestic air fares.
Newspaper headlines summed it up thus:
The higher wholesale prices of materials, fuel, etc. will also soon be showing up in manufactured consumer goods. In some cases they already have.
Competition and cost-cutting have so far absorbed in considerable measure the rise in raw material costs, but most industrialists say the limits are now being reached and price markups are inevitable, particularly on consumer durables.
The government is particularly worried about the effect this will have on the attitudes of workers as they begin the annual process of wage negotiations known as "Shunto."
The unions have been remarkably docile in recent times. This year they are seeking an average wage increase of under 7 percent, which is virtually nothing at all, and certainly doesn't make up for lost purchasing power over the past year. Instead organized labor has been concentrating on a campaign to raise the mandatory retirement age from 55 to 60.
If they succeed it will be an added burden on the overstrained economy as, like America, Japan is faced with a rapidly aging population. Official sources are worried that the predicted inflation explosion will persuade labor to raise its demands, setting off a wage- price spiral similar to that seen in, for example, Britain.
Japan so far has not had to face the choice of recession vs. inflation, as the US has for some time. Tokyo policymakers have let the market mechanism function relatively freely. But the temptation is growing for more bureaucratic interference as the economic climate becomes colder -- which could turn out to be like adding grit to a finely tuned mechanism.
Economists doubt any of the measures taken so far will stop the trend First, they say, inflation is not likely to subside in the foreseeable future.
Second, the huge current account deficit is here to stay. Japan is no longer in a position to mount a qhick export drive -- as it has done so well in previous moments of crisis -- in order to wipe out the red ink. The deficit-cutting process, out of both domestic and international considerations, will be painfully slow.
Third, inflation in the US is also likely to continue largely unabated. With American interest rates at a historically high level, Japan simply can't compete on that particular front. (The official bank rate here is 7.25 percent, although it may be raised slightly in the near future.) That will keep the dollar artificially high against the yen.