Yen's rise against the dollar cuts both ways. Dollar's fall likely to raise Japanese export prices, worsen US budget deficit
The Japanese are discovering currency accords are almost as fragile as cherry blossoms. Only a month after the United States and its five major trading partners met in Paris to stabilize currencies, volatility is shaking the fast moving markets.
Within the past week, the Japanese yen has fallen sharply against the US dollar. This quick plunge has wide ramifications for the Japanese export machine and comes at a vulnerable time in US-Japanese trade relations. (Japanese reaction to Reagan sanctions, Page 9.) A higher priced yen makes Japanese exports more expensive for Americans to buy.
At the same time, the US relies on Japanese investors to help it fund its budget deficit, because the Japanese are big buyers of US Treasury issues, which have higher yields than comparable Japanese securities.
A lower valued dollar ``means the [US] government will have to pay more for money,'' says Scott Pardee, vice-chairman of the securities firm Yamaichi International.
This is likely to be the subject of discussion today when the Federal Reserve Board's Open Market Committee begins a two-day meeting. Some economists believe the Fed may choose to tighten interest rates slightly as a result of the falling dollar.
The thought of higher interest rates and the dollar's sharp drop were reflected in the stock market, which opened Monday with an eye-opening plunge. Within the first hour, the Dow Jones industrial average fell 74.71 points. (See story, Page 2.)
Some currency experts believe the dollar's drop can be traced to a lack of support from Washington. ``The dollar will go lower until the US government decides to support its own currency,'' Mr. Pardee says, adding that key government officials, such as Treasury Secretary James A. Baker, have failed to use the ``code words'' the currency markets rely on for guidance.
A week ago in congressional testimony, Mr. Baker said the US had no target for the dollar. ``This was an open invitation to the market,'' says Pardee, who managed the currency operations at the New York Federal Reserve Bank six years ago.
Currency experts also blamed the dollar's fall on trade friction revolving around the US decision on Friday to impose $300 million in tariffs on the Japanese for not sticking to an agreement on semiconductors, the silicon wafers that make computers work.
``I guess there was some fear Japanese institutions might get rid of dollars abroad,'' says Robert Dederick, an economist with Northern Trust Co. in Chicago. But Mr. Dederick adds the primary reason for the dollar's fall is the feeling among traders that the currency must go lower.
The dollar's fall came without any negative change in the economic fundamentals. The US trade deficit appears to be stabilizing, and a stronger economy seems to be providing higher tax revenues than expected, assuaging the government's need for new funds.
``The market has not picked up on those things,'' says Cynthia Latta, a senior financial economist at DRI Inc., an economic forecasting company in Lexington, Mass.
The rising yen is increasing the prices of many Japanese goods, making some less competitive. As a result, many Japanese companies are planning to set up factories in Korea and Taiwan where currencies are pegged to the US dollar.
The falling dollar means the Paris accord, like the cherry blossom season, is almost over. The cherry blossoms in Washington are supposed to peak Thursday.