Old yardsticks for comparing yen and dollar are ... old
Americans returning from Tokyo regale their friends with tales of $14 cantaloupes, $80 breakfasts, and cab rides from Narita Airport that cost as much as transpacific air fares. Even outside the high-rent district of Tokyo, goods and services are extremely expensive - and not just for tourists. The Japanese may have plenty of dollars today, but their purchasing power is much lower than Americans'.
This leads many people to believe that the dollar is now quite cheap compared with the yen, that it does not need to fall any further. If melons and cab rides were all that mattered, they would be right. If Americans and Japanese were living in a perfect test tube for economic laws, parity would have long since been achieved.
Too bad that is not the case. Most economists believe that important structural changes in trade have occurred over the past decade. For one thing, Americans continue to love Honda Civics and Sony TV sets, despite higher prices. For another, money is shuttling around the world in ways that defy the efforts of governments and central banks to manage exchange rates for very long.
As a result, these economists warn, the United States trade deficit is likely to persist. And so, after a period of election-year calm, the dollar could become unmoored again and fall sharply.
``The dollar is still much too high,'' says Rudolph Dornbusch, professor of international economics at the Massachusetts Institute of Technology. ``It could drop 30 percent more from here to get trade in balance.''
Last year, on average, $1 could be swapped for 145 yen. That was already about 40 percent lower than the rate in 1985. Today, it takes only 130 yen buy a dollar. If Professor Dornbusch is correct, 90 yen could be the eventual rate.
That will make for some amazingly pricey melons in Tokyo.
Already, a dollar spent in the United States buys much more than a dollar spent in Japan. According to a report prepared by economists at Drexel Burnham Lambert, $1 would have to fetch 213 yen in order for there to be ``purchasing-power parity'' between people in each country.
That would seem to indicate plenty of room for American traders to compete with the Japanese. The problem, however, is that ``purchasing-power parity'' is a way of measuring things like cab rides and restaurant meals. It is not such a good indicator of exchange rates that help American goods compete in Japan.
Adjusting the exchange rates for changes in inflation is a better idea. Adjusting for inflation, the dollar would actually have bought 178 yen last year, says David Rolley, senior economist with Drexel Burnham Lambert. This would put the dollar about where it was during the late 1970s, when the US enjoyed a trade surplus and, presumably, all was right with the world.
So does this mean the dollar does not need to fall any further?
Sorry, says Mr. Rolley. Like Mr. Dornbusch, he believes old measurements just don't apply. The late-1970s world is not the late-'80s world.
``The nature of why people are buying and selling currencies has changed,'' Rolley says. ``The international mobility of capital has transformed foreign-exchange markets.''
Japanese, for instance, only need to buy dollars if they want to buy American products. Without this desire, the dollar will remain weak. Rolley points out other complexities that make a return to the late-'70s trading world impossible:
Trading patterns: As Americans earn more, they always want more imports. Prosperity at home continues to hurt the trade balance.
Americans now import much more than they export. Just to keep the trade deficit at its current level, US exports would have to grow twice as fast as imports. That seems unlikely. The ability of the rest of the world, which is growing fairly slowly, to absorb US exports is limited.
What's more, 40 percent of US trade today is with countries in the ``dollar zone'' - Canada, Latin America, and the Asian Rim. A weaker dollar does no good in slowing exports from these nations.
Commodities: Some 10 percent of the US import bill goes to oil. Oil is priced in dollars, so exchange rates don't help Americans spend less for oil. And since oil imports are expected to rise, this bill is bound to go up.
West Germany and Japan, however, have been given a windfall by these lower prices for oil and other commodities. Their surpluses are so large that their currencies will have to continue increasing to restore exchange-rate balance.
Debt: Just servicing the external debt is now costing the US $25 billion a year. This could rise to $50 billion by 1990.