U.S. Pushing Japan to Internationalize the Yen
It has been a year since Japan promised to liberalize its financial market and gradually internationalize the yen so as to allow Japanese and foreigners to use Japan’s currency more freely. But progress has been slow, and the United States is growing increasingly impatient with the rate of progress.
In a recent round of financial consultations between the two countries, David Mulford, an assistant secretary of the Treasury, warned Japanese officials that protectionist pressure from Congress and American businessmen requires “quick results” that will cut the massive American trade deficit with Japan. He said that allowing greater use of the yen “could yield important results quickly.”
The U.S. Treasury Department regards Japanese restrictions on its financial markets and international use of the yen as one of the causes of the trade deficit that last year was $36.9 billion and in the first five months of this year was running at an annual rate of $46.6 billion.
But Toshimitsu Oba, vice finance minister for international affairs, made it clear that there is not likely to be any quick action.
Oba told Mulford in the recent talks that interest rate restrictions on large-denomination, long-term financial instruments, such as certificates of deposit and money-market certificates, would be lifted by the spring of 1987, completing a liberalization of that segment of Japan’s financial market.
But he gave no indication of when Japan might begin--much less complete--its liberalization of what Mulford described as the most important segment of the market: short-term financial instruments.
“Our chief concern is that, in Japan today, efficient financial markets in which interest rates are freely determined by market forces simply do not exist,” Mulford said. Consequently, financial institutions cannot find sources of short-term capital in Japan and investors cannot find attractive short-term investments here, he said.
“These problems demand immediate attention. . . . The yen will not reflect its true value until there is full development of the shorter end of the market, and these types of assets are available to all investors--domestic and foreign,” Mulford said.
The Treasury Department hopes that creating more ways to invest in the yen will, in turn, create greater demand for the yen and raise its relative value and that this will tend to reduce the bilateral trade imbalance.
A stronger yen would make Japanese goods more expensive and American goods cheaper. A Japanese exporter, for example, who now receives about 250 yen for every $1 worth of exports he sends to the United States, would have to raise his prices to maintain profits if the dollar’s value fell to as little as 200 yen. Conversely, an American exporter who now sells his product in Japan for 250 yen for every $1 of cost could sell more if the dollar’s value fell to 200 yen.
The trade imbalance itself is troubling enough, but the Japanese have been compounding the problem by investing foreign earnings in dollars rather than yen--further depressing the value of the yen and strengthening the dollar.
Moreover, the growing overseas spending is considered highly volatile.
Masataka Okura, president of the Japanese Export-Import Bank, noted recently that the Japanese poured about $50 billion into overseas investment last year but said only $10 billion of it went into direct capital investment.
“Most of the overseas investment, in essence, is of a very short-term nature,” Okura said. “I have great uneasiness over whether this kind of investment can be stabilized for a long period or not.”
(At end of 1984, Japanese held a cumulative total of $87.6 billion in foreign securities, much of it in U.S. Treasury notes.)
Oba told Mulford that Japan will announce a detailed schedule for step-by-step liberalization of long-term financial instruments as part of a three-year “action program.” Prime Minister Yasuhiro Nakasone has said that the details of this program will be made public by next week.
Still, Mulford complained that deregulating such long-term instruments--issued in amounts of $400,000 to $800,000--”only gets at the periphery of the interest rate structure. It does not get at the heart of the matter.
“Japan needs to create a true money market in which supply and demand work freely and in which the (interest) rates are determined by the market,” he said.
The United States, he said, wants Japan to create an interbank market offering overnight deposit facilities and operating without collateral.
It also wants Japan to broaden the market for certificates of deposit and shorten their terms and allow the market for bills issued by companies and sold at discounted rates to operate freely, without the intervention of brokers to influence interest rates.
He also urged the government to set up an unrestricted short-term government bond market in which small investors could take part.
Even the beginning of a “Euro--yen market” for yen securities--the main arena in which the Finance Ministry has lifted curbs significantly to date--left Mulford unhappy, he said, because the Japanese government still restricted overseas yen transactions by Japanese. Japanese, “the natural suppliers and takers of yen, must have full access to the Euroyen market if the yen is truly to become internationalized,” he said.
The Finance Ministry recognizes that the yen is undervalued, Mulford went on, but added that “Japanese are more free to issue assets denominated in currencies other than yen than they are to do so in yen.”
The news is not all bad, however.
Treasury Secretary James A. Baker III, visiting Tokyo to attend a meeting of finance ministers of the so-called Group of Ten, received word from Finance Minister Noboru Takeshita that Japan would go one better than its previous promise to allow eight foreign banks to join the trust banking business here, which to date has been limited to eight Japanese banks specified by the Finance Ministry. All nine foreign banks that applied will be approved, according to Takeshita.
With the aging of its society helping to create huge corporate pension funds--these are expected to increase to $240 billion from $56 billion in the next 10 years--foreign entry into the trust field promises to offer major new opportunities.
Six of the foreign banks that will enter the trust business here are American--Citicorp, Bankers Trust Co., Manufacturers Hanover Trust, Chemical Bank, Morgan Guaranty Trust and Chase Manhattan. The others are Credit Suisse and Union Bank of Switzerland and Barclays Bank of Britain.
