Could Slow Economy : Interest Rate Hike Feared if U.S. Tries to Prop Dollar
The simmering trade dispute between the United States and Japan, which boiled over into the world exchange markets Monday, demonstrates the inability of last month’s currency agreement in Paris to alleviate deep differences in economic policies among the leading industrial nations.
Analysts and policy makers fear that the Federal Reserve will not be able to prevent a collapse of the dollar without sharply pushing up interest rates to attract foreign investors, a move that would almost certainly derail the 4-year-old U.S. economic recovery.
The dollar plunged to new lows against the yen Monday, and stock markets around the globe fell sharply in reaction to the U.S. decision to slap harsh tariffs on a number of products from Japanese electronic firms in retaliation for the breakdown of the accord between the two nations in which Japan promised not to sell semiconductors at unfairly low prices.
“The semiconductor agreement is the trigger of a crisis that was waiting to erupt,” said C. Fred Bergsten, president of the Institute for International Economics.
Last month, the United States and five other leading countries agreed to try to stabilize currency markets, fearing that any further decline in the dollar aimed at reducing the U.S. trade deficit would backfire by seriously damaging economic growth in export-dependent Japan and West Germany.
In recent days, however, the Paris accord has been undermined by currency traders convinced that the Reagan Administration is not prepared to vigorously defend the dollar against the yen in the face of domestic political pressures to crack down on Japan.
“It’s hard to see how the U.S. can continue to threaten to prop up the dollar and defend the yen during a trade dispute with the Japanese,” said Robert Solomon, an international finance specialist at the Brookings Institute, a moderate-to-liberal think tank here. “It now seems obvious that the Paris agreement is a dead letter.”
Although both U.S. and Japanese officials downplayed the dangers of further retaliation, analysts said that the Reagan Administration’s move against Japanese microchips has added to uncertainty over global economic prospects by raising the risk that the feud will flare into a full-fledged protectionist battle between the world’s two richest nations.
Could Dump U.S. Stocks
“This is a trade war scare,” said Allen Sinai, chief economist at Shearson Lehman Bros. in New York. “The fear is that U.S. tariffs will lead to retaliation from the Japanese where it hurts. Instead of dumping chips, they could dump (stocks and bonds) in the open market. That’s their ultimate weapon.”
Most analysts are convinced that the U.S.-Japan trade dispute will not escalate out of control. But there are growing worries that neither Japan nor the United States is prepared to move fast enough to correct the underlying economic dispute--America wants Japan to stimulate its domestic economy and open its markets wider, and Japan is reluctant to shift from its export-driven economy unless the United States drastically cuts its budget deficit.
The United States and Japan, economists say, are running the risk of locking themselves into perilously intractable positions.
“The Japanese have been running a deliberately deflationary policy out of a misguided fear of budget deficits,” said Alan Reynolds, chief economist at Polyconomics, a “supply-side” consulting firm based in Morristown, N.J. “But now we seem to have come up with our own kamikaze policy of protectionism in hopes we can coerce Japan into doing what we want. That is a very dangerous game.”
Contributing to the dollar’s slide were statements by top Treasury officials last week that also appeared aimed at pressuring Japan to respond to U.S. pleas for a more expansive economic policy.
In separate testimony before congressional committees, Treasury Secretary James A. Baker III and his top international economic policy aide, Assistant Secretary David Mulford, said that the Administration has no target for the dollar.
Patience Running Out
Mulford, suggesting that U.S. patience with the go-slow policies of Japan and Germany was nearing the breaking point, called on both nations to move quickly to stimulate their economies.
Although those remarks were similar to previous comments by senior Administration officials when trying to avoid being pinned down on the dollar, traders interpreted the statements as a retreat from the Paris agreement to foster currency stability around current exchange rate levels.
