Yen’s Decline Hasn’t Hurt U.S. Competitiveness--Yet
The U.S. dollar’s new-found strength is bewildering economists, frustrating world central bankers and making some smart currency traders very rich.
But lost in the thicket of debate over why the dollar is rising is the most important issue of all: what the surge is doing to U.S. companies’ competitiveness.
The competitiveness question is only now beginning to be raised anew, as it becomes clear that the dollar’s strength isn’t a fluke. And how U.S. companies deal with that question will have dramatic repercussions, particularly in trade-driven regions such as Southern California. Jobs, capital spending decisions and long-term economic prosperity are at stake.
Against the Japanese yen, the dollar now has taken back all of the ground lost since 1987. For a U.S. exporter whose goods are priced in yen, here’s what it means: To buy $1 worth of your product in November, 1988, a Japanese buyer needed 121 yen. Now, that buyer needs about 152 yen--26% more--for the same $1 worth of product.
Either you demand the higher price, and risk losing market share, or you cut your price and sacrifice profit. If you keep the price at 121 yen, you’ll bring home just 80 cents now for a product that brought you $1 in 1988.
The dollar’s rise has been ongoing since early 1989. Yet through most of last year, Wall Street chose to look past the negative effect of the dollar on exporters’ profits. When first-quarter profit reports begin to flood the market in April, however, the dollar damage may be tougher to ignore, given the currency’s growing strength.
“It’s going to be bad for corporate earnings,” warns Robert Brusca, economist at Nikko Securities International in New York.
Weyerhaeuser Co., the Tacoma, Wash.-based forest products giant, illustrates the problem. “We sell a large chunk of our newsprint to Japan, priced in yen,” said the company’s senior economist, Lynn Michaelis. So a strong dollar “has a huge effect on profitability,” he said. In the first quarter, “it’s going to negatively affect our margins in newsprint,” a key business.
Longer term, Michaelis said, “a strong dollar could cause us to pause in some of our investment strategies”--for example, an expansion of newsprint production capacity that the firm has been mulling.
Last week, Caterpillar Inc. President Donald Fites criticized U.S. officials and others who have said that the rising dollar isn’t a problem for U.S. exporters. Caterpillar, a heavy-equipment maker and a major exporter, competes with Japan’s Komatsu Ltd., which gains a pricing advantage with every uptick in the dollar.
Yet as bad as the fallout may be for some U.S. exporters, many experts insist that overall U.S. competitiveness in foreign trade isn’t threatened--yet. They point out that the dollar remains well below its 1985 peak, when it took 250 yen to buy a buck. And some experts argue that the underlying reasons for the dollar’s strength actually bode well for U.S. companies in the 1990s.
It helps that many U.S. firms are much smarter about trade than they were five years ago. More of them have manufacturing plants overseas that help insulate them from currency swings.
Also, many companies slashed costs in the ‘80s to lower break-even levels and give themselves more breathing room on profit margins to cope with currency swings. They may have to accept lower margins as the dollar rises, but they’re not bleeding red ink as they might have five years ago at the same exchange rates.
Some companies, such as Du Pont Co., are able to protect a big share of their exports from currency swings through long-term supply contracts at fixed rates, notes Ian C. James, an international economist at Du Pont.
Perhaps most important for many exporters, the dollar’s strength so far has been selective: While the currency has risen sharply against the yen in recent months, it has risen only slightly against other key currencies.
For example, while the dollar has gained 6.5% versus the yen this year, it has risen just 1.6% versus the Canadian dollar.
The huge shift in the dollar-yen relationship has puzzled many experts, but two causes stand out:
* The U.S. economy’s resilience has continued to surprise investors around the globe, and that has lured money here--especially given our rising interest rates.
* At the same time, disillusionment with Japan’s outlook has encouraged an outflow of money from that nation, despite a surge in interest rates there as well. While many experts believe that Japan will raise interest rates further to try to boost the yen, it isn’t clear whether that will work.
Nikko’s Brusca said Japan’s political problems--including the ongoing squabbling between the Bank of Japan and the Ministry of Finance over the nation’s economic course--have left investors worried. “There is no political leadership in Japan,” he said.
Some economists say the yen’s weakness--and the sharp decline in Japanese stock prices--are signs that smart investors are bailing out of Japan ahead of worse turmoil.
Jerry Jordan, economist at First Interstate Corp. in Los Angeles, argues that Japan is in a wrenching transition period. Japanese workers will increasingly demand a better life--including more and cheaper goods through an end to protectionism, Jordan said. A Japanese economy that increasingly looks inward to satisfying its own people will open more opportunities for U.S. exporters and may be less of a threat in the U.S. market itself, he contends.
The consumerism trend in Japan already may benefit some U.S. exporters. Cergro International, a City of Commerce-based exporter of packaged foods, hasn’t seen much change in Japanese demand for its products despite the falling yen and rising prices, said Robert de Paszthory, general manager. That’s partly because Cergro deals directly with Japanese distributors, “and when prices rise they look for the most efficient suppliers,” De Paszthory said.
But beyond that, he said, “In the long run the Japanese have to come to the U.S. for food products,” given their limited food production capabilities.
Still, many experts aren’t nearly so sanguine about other U.S. companies’ ability to sell in Japan and compete with Japan if the yen stays weak. Concern is rising in Congress, and the Bush Administration is pushing hard to persuade Japan to do more to bring down its trade surplus with the United States--a surplus that may get worse instead of better if the yen falls further.
“They still are an economy that believes in exports,” said Weyerhaeuser’s Michaelis. “They have to export products to get the money to buy raw materials.” To think that Japan will be any less a force in exports in the 1990s--especially if the yens weakens--is a dangerous deception, he said.
DOLLAR VS. KEY CURRENCIES
The dollar’s strength this year has chiefly been against the yen. Against most other currencies, the dollar is up only slightly.
Currency per dollar Pct. Country Dec. 31 Tues. chg. Japan (yen) 142.90 152.20 +6.5 % Australia (dollar) 1.269 1.316 +3.7 % Canada (dollar) 1.158 1.177 +1.6 % W. Germany (mark) 1.687 1.712 +1.5 % Hong Kong (dollar) 7.805 7.873 +0.9 % France (franc) 5.773 5.794 +0.4 % Britain (pound) 0.620 0.622 +0.3 %
THE DOLLAR’S NEW STRENGTH
With its recent surge, the yen-dollar rate now is exactly where it was three years ago--but still far from the 250-yen peak in 1985.
Yen per dollar. Tuesday close: 152.20
Source: Knight-Ridder TradeCenter
