NEWS ANALYSIS : THE VOLATILE DOLLAR : The Stronger Yen Will Lead to an Even Stronger Japan : Asia: Exporters will indeed be hurt, but businesses will be forced to make changes that will benefit the country in the long run.

Although the yen’s extraordinary appreciation against the U.S. dollar will inflict great pain on many Japanese exporters, it is also accelerating trends that could make Japan even more economically powerful in the future.

As the yen has surged--hitting a post-World War II record of 80.15 yen to the dollar in Tokyo on Monday, although it recovered to close at 83.90 in New York--Japanese business leaders have responded in a chorus of misery. In one typical remark, Takeshi Nagano, president of the Japan Federation of Employers Assns., bluntly declared: “Japan’s manufacturing industry will suffer a heavy blow and will be destroyed.”

But these dark warnings are not a prelude to the deindustrialization of Japan. To the contrary, they set the social and political preconditions for needed adjustments: more shifting of low-technology production offshore, further cost cutting at home, greater use of imports to raise the Japanese standard of living, and further upgrading of Japan’s role as a high-technology and “headquarters” economy.

Such changes are easier to impose in an atmosphere of crisis, which is what has now engulfed Japan even as Americans remain largely unperturbed by what is seen here as the debasement of the dollar.

Compared to Japan, the United States has suddenly become a low-wage country. Calculated at 82 yen to the dollar, Japanese workers earn, on average, about 45% more than the average American.

The challenge this poses to Japanese companies is all too real. For exporters determined not to raise prices, rising labor costs must be made up for in greater efficiency or lower profits. The yen has strengthened about 15% just since March 1, a pace so dramatic that export companies cannot keep up. Many observers believe the ripple effects of the strong yen will stifle Japan’s budding economic recovery.

Unemployment, currently at 2.9%, may creep upward as some hard-pressed firms renege on implicit guarantees of lifetime employment. Wage increases this spring were the lowest in 50 years, and they could be even lower next year.

But the sense of crisis does not mean the Japanese economy is falling apart nor that Japan will become less formidable an international competitor nor that its huge trade surpluses--as measured in dollars--will fall sharply any time soon. It mainly means that Japan will redouble its efforts to adjust.

“The surge in the yen speeds up the building of a new Japan,” said Jesper Koll, head of economic research at J.P. Morgan Securities Asia Ltd. “It will be a Japan that is meaner. It will be a Japan that is leaner.”

Toyota Motor Corp., for example, has issued a series of alarmed statements in recent days, warning that the strong yen will give it no choice but to move production overseas despite its own “grave concerns” about the “hollowing out” of Japanese industry.

In a colorful interview with Kyodo News Service, Toyota Executive Vice President Hiroshi Okuda declared that in the mid-1980s, when the yen appreciated to hit 200 yen to the dollar, he “felt as if the waters had reached our company’s navel.”

“When the yen broke through the 100 yen line (last June), I felt as if the water had reached our company’s neck and was threatening to drown us,” he continued. “The level of 85 yen to the dollar means the water level has already submerged our nose, making it impossible to breathe.”

So is Toyota in big trouble? Don’t bet on it. Okuda’s words have a deeper layer of meaning.

“For Toyota it is very easy to cut costs, but to do that, Toyota will have to breach a social contract,” Koll explained. “It will have to squeeze suppliers’ margins, and will have to fire some of its (unproductive white-collar) madogiwazoku --the ‘window sitters.’ ”

The sounding of alarms has also contributed to new government pledges to take action to shore up a sagging stock market and take steps to counter the yen’s seemingly inexorable rise.

Prime Minister Tomiichi Murayama on Monday instructed economic officials to develop an emergency economic stimulus plan by Friday to help the yen-battered economy.

Chief Cabinet Secretary Kozo Igarashi, the top government spokesman, said the plan will include a faster timetable for planned public works spending, subsidies to small companies hit by yen appreciation and a reduction in the securities trading tax to revitalize the stock market.

The response of investors to even these vague promises shows how much power the government retains to influence stock prices. Early last week, the widely watched 225-stock Nikkei index hit a 32-month low of 15,381.29. Despite further yen appreciation since then, the Nikkei recovered some losses last week and on Monday shot up another 443.59 points, or 2.82%, to close at 16,163.09.

The resilience of the stock market reflects Japan’s potential to cope with even such previously unimagined currency levels as 80 yen to the dollar.

During earlier spurts of yen appreciation in the 1990s, Japanese exports proved remarkably strong as other more rapidly expanding economies, including that of the United States, pulled in Japanese goods. This situation seems set to continue to be repeated at least through this year.

Most Japanese exports are not only high quality but also price-competitive, and in many important fields Japanese firms enjoy quasi-monopolies of items needed by manufacturers in the United States and elsewhere. If exporters run out of room for domestic cost-cutting and feel the need to raise prices overseas--something they have resisted as much as possible during previous bouts of yen appreciation--there is considerable space for them to do so in many product lines.

Further, the soaring yen has the added effect of slashing the cost of Japan’s massive raw material and food imports, reducing manufacturers’ production costs and holding out the possibility that Japanese living standards could rise significantly in coming years without any appreciable increase in wages.

So far, the potential to import inexpensive food and consumer goods has made only a nick in Japanese living costs. But as foreign prices become fabulously low in yen terms and some regulatory barriers to imports are eased, the potential grows for this to change.

Five years ago, for example, imported French wine typically cost at least 4,000 yen a bottle, or nearly $28 at the 1990 exchange rate. Now the same wine can be purchased for about 1,000 yen ($12.20 at the current rate), and cheap French varieties that were unobtainable before can be found for as little as 380 yen ($4.65).

Yet the growing volume of foreign imports doesn’t mean that America’s huge trade deficit with Japan, which hit $65.7 billion last year, will necessarily fall sharply or soon.

In a new book, “Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000,” journalist Eamonn Fingleton notes that Japan’s nearly monopolistic leadership in many areas of manufacturing is so strong that yen appreciation, even when passed on in higher prices, does not have the effect of reducing Japan’s exports.

“As the yen rose (through the early 1990s) . . . America had little choice but to reach into its pocket to pay ever higher prices for Japanese goods--particularly for sophisticated parts and production machines,” writes Fingleton, a former editor for Forbes and the Financial Times who has lived in Tokyo since 1985. The situation he describes persists for many products today.

Even the resurgent U.S. auto industry is heavily reliant on Japanese-made production equipment and parts. Japan’s dominance is much greater in many other important but less visible fields, ranging from laser diodes for compact disc players to robotics and bearings.

A belief that yen strength may continue is prompting many Asian central banks, including those of Taiwan and China, to shift some dollar reserves into yen. Recent days have brought new attention to this phenomenon, which analysts say has been going on at least since last year.

An anonymous “senior Finance Ministry official,” for example, was quoted by Kyodo News Service on Monday as attributing the yen’s soaring strength not only to Japan’s trade surplus but also to decisions by other governments and foreign firms to buy yen.

“We cannot tell the level at which the yen’s appreciation will stop, given that changes in assets from dollars to yen are under way,” the official said.

While the “hollowing out” of Japanese industry is often bemoaned here, the pain of moving some production overseas is at least partly offset by the advantages of a growing role as a headquarters economy, with Japanese corporations organizing low-wage production in well-equipped factories from Indonesia to Mexico.

If cheaper imports, from clothing to electronic appliances, eventually start to bring down living costs for Japanese consumers, many of those products will come from these offshore operations. The strong yen makes such investment easier than ever before, while the construction of new overseas plants ensures continued high demand for Japanese machinery and sophisticated parts.

High-quality low-cost components sent back to Japan from these factories can in turn hold down the cost of final products assembled here, contributing in yet another way to Japan’s continued competitiveness.

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Japan Inc. Under Pressure

The High Cost of Labor

Japan’s unit labor costs have been higher than those of the United States for some time. Unit labor cost index; 1990=100:

Japan: 118.7

United States: 101

Slowing the Fall

After hitting an all-time low in Tokyo on Monday, the dollar gained in New York.

The dollar in yen, weekly closes except latest:

Monday: 83.90

The Nikkei’s Fall Slows

The Nikkei-225 index, weekly closes except latest:

Monday: 16,163.09

Source: Datastream, TradeLine. Researched by JENNIFER OLDHAM / Los Angeles Times