Yen’s Surge May Threaten Japan’s Recovery Chances : Commerce: Business leaders say the stronger currency could lower exporters’ profits.

The yen’s rise to a record high against the dollar is striking fear in the heart of corporate Japan and jeopardizing chances of a recovery.

Business leaders say the stronger Japanese currency has thrown government trade policies into question and could take a big chunk out of exporters’ profits.

“The weak economy and yen appreciation promise to make life difficult for exporters,” said Hajime Ohta, director of the international economic affairs department at Keidanren, Japan’s most powerful business lobby.

In New York last Wednesday, the dollar smashed through its previous record low of 120.45 yen, set in January, 1988, to hit 119.50. That marked a 4% drop for the dollar from levels earlier this month.

Although the dollar has since recovered slightly to about 120.50 yen, many economists expect the Japanese currency to keep rising.

The dollar could drop to 115 yen in coming months because the yen is now seen as a safe haven for investors trying to avoid the turmoil gripping Europe’s markets.

A strong yen will hurt exporters in two ways. Prices of Japanese goods in other currencies will rise, making sales harder, and dollar profits will also net fewer yen for the bottom line.

Many of Japan’s exports are denominated in dollars, so a stronger yen translates directly into lower profits or even losses on overseas sales, economists said.

Export-oriented Japanese companies such as car makers and electronics manufacturers will be hit the worst. Analysts estimate that electronic firms export about 40% of their machinery and parts production.

An official at Fujitsu said a five-yen drop in the dollar would mean a $33-million drop in revenue in the second half of the fiscal year.

“This is not a good omen,” said Jesper Koll, economist at S. G. Warburg Securities (Japan).

“The competitiveness of Japanese companies will come under further pressure.”

For now, he and other economists say most companies should be able to cope with a slow rise in the yen by cutting costs. But should the dollar fall quickly--by more than 10 yen--profound changes could be in the offing.

Ohta at Keidanren said if the dollar falls to 100 yen, Japanese companies will be forced to rethink fundamental strategies and could start building overseas plants again.

The stronger yen also poses a serious problem for Japanese economic policy-makers who have long advocated gains in their currency to help cut the huge trade surplus.

With the domestic economy on the rocks, one of the few bright spots for economic growth here has been exports. Some officials may now be reluctant to see them decline.

According to gross national product statistics released last week, growth in domestic demand was virtually flat in the second quarter while net external demand climbed 0.3%.

On the other hand, a stronger yen would help underpin gains in the stock market, which would help banks meet international standards for capital.