Dollar Slides to New Low vs. Yen; Japan Intervenes
The U.S. dollar plunged Monday on foreign exchange markets here, closing at 171.90 yen after dipping as low as 171.50, its lowest rate since World War II. The dollar slipped steadily in heavy trading in spite of reported daylong intervention by the Bank of Japan in support of the U.S. currency.
The single-handed attempt by the Bank of Japan to prop up the dollar, on Monday as well as last week on the New York market, indicated a rift on currency issues between Japan and other leading industrialized countries just two weeks before the opening of an economic summit here.
The dollar began trading Monday at 173.15 yen, 1.15 yen below its Friday close in New York and 3.95 yen below the Tokyo close last week. Both the opening and the closing figures were record lows. (The dollar closed at 171.05 yen in New York.)
Investors on Selling Spree
Traders estimated that the Bank of Japan bought $1.5 billion in U.S. currency, as investors and exporters went on a selling spree. Trading here totaled $6.677 billion, a record high.
While the United States has let the dollar decline to improve the competitive position of its exports, Japanese leaders had recently expressed hopes that it would not weaken below 180 yen. Calculated by the International Monetary Fund’s formula, the yen has appreciated 41.1% against the dollar since Sept. 22, 1985, when the United States, Japan, Britain, West Germany and France agreed on joint action to force down the value of the dollar.
“The government cannot tell people what to do and what not to do,” Japanese Prime Minister Yasuhiro Nakasone said Monday in Parliament. “But, as I have stated many times before, wild fluctuations in currency values are not desirable.”
Dollars Dumped on Market
In the past, the central banks of the five major industrial democracies have cooperated to drive down the dollar, but on Monday the Bank of Japan acted alone as it tried to stem the tide of dollars being dumped into the market.
Last Friday, the Bank of Japan was also reported to have bought $200 million worth of the currency in New York when the dollar sank to its previous low of 172.30 yen.
Foreign exchange dealers here attributed the dollar’s slide Monday to lack of market confidence in the immediate future of the U.S. economy and rumors that the Federal Reserve Board may lower its discount rate again, as well as a feeling that the Bank of Japan’s intervention alone would not be enough to stop the slide.
“The market evaluated the performance of the U.S. economy as good in retrospect, but it did not give the United States high marks for the future,” said Koichiro Kitade, foreign exchange dealer at Citibank’s Tokyo branch.
Skeptical of Future
Dealers said that under normal circumstances they would have reacted positively to last week’s Commerce Department figures indicating a 3.2% expansion in the U.S. economy during the first quarter. However, news of high inventories and sluggish consumer spending forced them to be skeptical of the immediate future.
Traders last week apparently sold dollars in the expectation that the Federal Reserve Board would soon lower the discount rate to spur consumer spending. The board lowered the rate by half a percentage point to 6.5% on Friday. The Bank of Japan followed suit Saturday, cutting its rate by half a percentage point to 3.5%.
But, since the Japanese rate is already at its lowest point since the end of World War II, traders reportedly believe that Japan may not move in concert with the United States the next time the Federal Reserve lowers the rate. This caused a move away from the dollar to the Japanese currency.
Meanwhile, the rising yen threatens to become a political and a diplomatic problem for Japan.
The Japanese government has been under pressure to come to the aid of large numbers of small companies that rely heavily on exports to stay in business. Demands for government help have been especially strong from the ranks of Prime Minister Yasuhiro Nakasone’s Liberal Democratic Party. Parliamentary elections are expected later this year.
At the same time, Japan has promised its overseas trading partners to restructure its economy to become less dependent on exports and more able to import goods from other countries.
Currency values and the restructuring of the Japanese economy are both expected to be major topics at the May 4-6 Tokyo summit, which will be attended by President Reagan, Nakasone and the leaders of Britain, France, West Germany, Italy and Canada.
Earlier this year, Japan set up a $1.7-billion fund to help export-dependent industries troubled by the high yen, drawing criticism from the United States, where it was felt that such a fund would nullify the hoped-for effect of the currencies realignment. U.S. Trade Representative Clayton Yeutter condemned the law as unfair and threatened retaliation against Japan under GATT rules.
Meanwhile, there are strong indications that jobs are being lost here because of the sudden rise in the value of the yen relative to the dollar and other currencies.
Shipbuilders in South Korea, for example, have reported a surge of orders, which they attribute to a sudden decline in the competitiveness of Japanese shipyards as a result of the high yen. And Bandai Co., a leading Japanese toy maker, announced March 20 that it would transfer 15% to 20% of its manufacturing to overseas plants this year.
The company expects 50% of its manufacturing to be conducted abroad three years from now and ultimately is aiming to move 70% of its business overseas. The company has plants in Taiwan, Hong Kong and Singapore and is building one in China.
Yet Nakasone said recently that Japan would emerge a net winner from the yen’s rise.
He told a businessmen’s club on April 5 that profits from the yen’s appreciation in fiscal 1986, including non-trade payments, should total 10 trillion yen ($58 billion). After subtracting the deflationary effect of the impact on exports, such a windfall would still amount to at least 2 trillion yen ($11.77 billion) and possibly as much as 3 trillion yen ($17.5 billion).
Nakasone said he intended to ensure that appreciation gains were reflected in lower prices for imports, which, in turn, would have the same effect on the economy as a tax decrease of the same magnitude.