Japan, U.S. Alter Interest Rates--Dow Spurts 31.96 : 2 Nations Act to Halt Dollar Slide

The United States and Japan unveiled today a coordinated plan to halt the fall of the dollar by widening the gap between U.S. and Japanese interest rates.

Visiting Japanese Prime Minister Yasuhiro Nakasone told President Reagan that he has ordered the Bank of Japan and the Japanese Finance Ministry to lower short-term interest rates, White House spokesman Marlin Fitzwater reported.

At the same time, Federal Reserve Board Chairman Paul Volcker acknowledged in testimony before Congress today that the U.S. central bank has tightened up on the credit supply, an action that encourages a rise in interest rates throughout the economy.

Dollar Rises Again

The dollar shot up to 141 Japanese yen at mid-session today, two yen above Wednesday’s close of 139. It also rose to 1.80 West German marks, from 1.7885 marks on Wednesday.

The stock market also rose sharply, with the Dow Jones industrial average up 32.10 points at X,xxx.

The joint U.S.-Japan actions came during a crucial three-day official visit to the United States by Nakasone, whose reputation has plummeted in tandem with the rising yen.

The moves will make investments in the United States more attractive by offering higher interest rates, while making yen-denominated investments less attractive to foreigners because of lower interest rates there. This should help buoy the dollar, which has fallen more than 40% against the yen in 18 months, economists said.

Japanese Economic Growth

At the same time, lower interest rates in Japan would stimulate economic growth there, providing “a major opportunity for increasing markets for U.S. goods,” Fitzwater said.

Volcker, in testimony before the House Banking Committee, said today that the Fed could be described as pursuing a “somewhat less accommodative” monetary policy in order to stabilize the dollar.

“It is fair to say, too, that in recent days the Federal Reserve has been a bit more cautious in providing reserves to the market,” Volcker said in answer to questions from the panel.

Reagan and Nakasone met at the White House against the background of the sharpest trade friction between the two countries since World War II, fueled largely by America’s huge trade deficit with Japan, which totaled $58.6 billion last year.

Trade Retaliation

The meeting came one day after the House approved legislation that would trigger trade retaliation against countries like Japan that maintain large trade surpluses with the United States.

Reagan told Nakasone he would veto the measure if it reached the White House, and noted that its narrow margin of approval--just four votes--ensured that the veto would be upheld.

Nakasone asked Reagan to lift sanctions he imposed on Japanese electronic products April 17 in retaliation for Japanese dumping of computer chips in third countries and for keeping markets closed to American chips.

Reagan replied the oft-repeated U.S. position that any decision would have to await analysis of figures dating from mid-April on whether Japanese markets have become more open to American goods and on whether the dumping has stopped, Fitzwater said.

At welcoming ceremonies on the South Lawn, under a brilliant sun, Reagan told Nakasone that “even the closest of friends have differences” and “we must address the current unsustainable trade balance.”