The Sword of Capital : YEN! : JAPAN’S NEW FINANCIAL EMPIRE AND ITS THREAT TO AMERICA <i> by Daniel Burstein (Simon & Schuster: $19.95; 335 pp.; 0-671--64763-6)</i>

On the afternoon of May 7, 1987, Japanese investors were about to flex the muscle they had gained over the American financial markets to teach the United States a lesson in economic dependence.

Frictions between Japanese and U.S. officials were high. Electronics giant Fujitsu had been blocked in its attempt to buy Fairchild Semiconductor, a leading chip maker in Silicon Valley. Congress was making protectionist noises and President Reagan was trying to ease the pain of a rising trade deficit by slapping tariffs on Japanese products in April.

At a secret meeting in Tokyo, the decision was made to teach the United States where power rests in the 1980s. Hajime Tamura, the outspoken chief of Japan’s powerful Ministry of International Trade and Industry, stated the mission bluntly: “Japan’s weapon is money. We should let the U.S. know what would happen if Japan refused to buy U.S. government bonds.”

As word slipped out that the Japanese might stay away from the May 7 auction of the Treasury bonds that finance the deficit, U.S. mortgage rates stopped a two-year decline and shot up two full percentage points. FederalReserve Chairman Paul Volcker convened an emergency meeting of his policy-makers.

In the end, the Japanese relented. The giant Japanese securities houses came to the auction, although their buying was far lighter than usual. Interest rates on the bonds rose one percentage point, enough to dampen the U.S. economic boom. President Reagan’s only trade action for the remainder of the year was to rescind the April tariffs.

The episode is recounted dramatically in “Yen! Japan’s New Financial Empire and Its Threat to America,” an important new book by veteran journalist Daniel Burstein that is good enough to merit the title’s exclamation point.

The reason “Yen!” is important is not Burstein’s skill at re-creating the drama of May 7, 1987, though the story is well told. Much of the information surrounding the events of that day has been reported before. The value comes from his ability to provide a context in which the Japanese bond squeeze can be seen as a clear signal that Japan will not hesitate to use its financial leverage to impose its will on the United States.

Just as the exclamation point is well-deserved, so is the characterization of Japanese influence over the U.S. economy as a threat to America. As Burstein chronicles on page after page, the interests of Japan and the United States are not always the same and when they diverge, its the landlord who has the final say and not the tenant.

The United States has gone from the world’s largest creditor to its biggest debtor during the 1980s and it is the Japanese who have picked up the tab and are poised to exercise their new control.

Burstein provides a thorough, well-paced account of the rise of Japan’s financial institutions and the fall of U.S. economic independence. Along with sounding the alarm about Japanese intentions, Burstein parcels out ample blame to the Reagan Administration for its failure to deal with the trade deficit and its willingness to hock the future of the country.

The election of Vice President George Bush to succeed Reagan and Bush’s decision to name James Baker as his secretary of state provide little cause for confidence that a more effective policy will be formulated in the new Administration. It was Baker who, as secretary of the Treasury, tried to solve the trade deficit by putting the dollar into a free fall. The deficit didn’t improve, but foreigners found they could buy even more U.S. assets at bargain-basement prices.

“Yen!” is less personal and somewhat narrower in focus than “Trading Places,” the excellent book about Japanese-U.S. relations by former Commerce Department official Clyde V. Prestowitz Jr. that was published earlier this year. But the concentration on Japan’s new role as the world’s banker is a necessary accompaniment to the Prestowitz book.

“Yen!” is best in describing the ascendence of the “Big Four” Japanese securities houses--Nomura, Daiwa, Nikko and Yamaichi--and their rapidly growing power on Wall Street. The section on the warrior culture of the “Nomura men” is fascinating.

In a passage that contrasts starkly with Wall Street in the Roaring ‘80s, one of Nomura’s superstars explains why he has turned down offers from American firms at 10 times his $35,000 salary: “Of course I would like to earn more money, but money is not the only thing in life. Loyalty to Nomura is more important.”

The book devotes lots of space to the securities houses, leaving the impression that it started life as a profile of the Big Four and was broadened to cover far more ground. Japan’s banks--the world’s 10 largest--get short shrift and its real estate acquisitions, part of the financial empire being built here, is virtually ignored.

The fictionalized “prelude” describing Japan’s total domination of the United States in the year 2004 detracts from the credibility of the book. Japan’s threat to U.S. sovereignty is driven home far more dramatically when Burstein describes a real proposal by the chairman of Nomura Securities International to transform California into a joint U.S.-Japan economic community shared by both countries.

Masaaki Kurokawa, the Nomura executive, unveiled his startling plan at a luncheon of live lobster sashimi for Americans in Tokyo. Japan will help the United States solve its trade deficit by strengthening the yen to 100 to the dollar, he said. At that exchange rate, Japan would be incapable of exporting profitably and the threat to domestic U.S. industries would disappear. Then a single joint currency would be created, freeing the Japanese to invest in the United States without worrying that deficit spending here would weaken the dollar and threaten the value of Japan’s investments.

In exchange for this generosity, what would the Japanese get? “California,” said the chief of a securities firm 20 times larger than the biggest U.S. house, Merrill Lynch.

With true stories such as this, Burstein has no need for fictionalized scenarios.