Anemic Yen Spreads Weakness Beyond Japan

Housewife Teruko Tamai steers her shopping cart past rows of California oranges, lemons and broccoli in the grocery floor of the Seibu department store and heads for the Japanese produce section, where she chooses a small head of broccoli for 350 yen--about $2.60--two individually wrapped oranges at 170 yen apiece and a perfectly proportioned head of lettuce for 250 yen.

With the origin of each product clearly marked, her choices are not an accident. Tamai tends to distrust foreign food anyway, she says. These days, with her household budget squeezed and the sickly yen driving up import prices, the decision is even easier.

“Because it takes the foreign food a long time to get here, I think there must be more chemicals inside,” she says. “And now that it is not much cheaper, I buy from Japan. I’m sorry,” she adds politely.

With the dollar hitting a seven-year high of 138 yen this week and stock markets in New York, Moscow and across Asia growing increasingly jittery, Japan’s weak currency is threatening not only American companies selling in Japan but the economic health of the entire region.

One problem with the anemic yen is that it undercuts efforts by other East Asian nations to turn their economies around. This is because Japan’s neighbors like South Korea desperately need to export cars, semiconductors, ships, VCRs and other products to relieve their own currency crises, create jobs and reverse the economic free fall.

As the yen weakens, it makes Japan’s already formidable exporters such as Toshiba and Matsushita even more competitive abroad. This in turn undercuts the likes of South Korean giants Samsung and Daewoo in U.S. and other export markets and impairs Korea’s recovery.

Indeed, some analysts worry that the yen’s weakness will provoke another round of currency devaluations among Asian nations--and perhaps even trigger China to devalue its yuan.

A more subtle, but perhaps more serious, cost for Asia and the rest of the world is lost opportunity. If Japan had spent the last several years opening its markets, deregulating its domestic economy and restructuring its banking and trading systems, the Asian giant today could assume the role of a world leader by spending more, helping its neighbors out of crisis and stabilizing the global economy, economists say. Instead, it is contracting.

“Japan is one of the biggest beneficiaries of the global free-trade system, giving it a huge responsibility,” said Andrew Shipley, an economist with Schroders Japan. “Instead, it’s now curtailing global growth.”

While Japan tried to strengthen the yen last month by purchasing U.S. dollars in the currency markets, this did little aside from depleting its foreign-exchange reserves. They fell by a whopping $17.8 billion in April to $205 billion, Japan’s largest such decline on record.

Many analysts see the dollar getting even stronger against the yen, perhaps breaking the 140 barrier. American officials nevertheless are hoping Japan’s new $125-billion economic stimulus package, its largest ever, will jump-start the economy and thereby expand sales of American products.

“As more and more details of the package become available, we’re looking for opportunities in the haystack,” said Sam Kidder, U.S. minister counselor for commercial affairs in Tokyo.

In the real economy far from Japan’s bureaucrats, however, encouraging Tamai and her fellow consumers to open their wallets, particularly for imports, won’t be easy. Overall imports fell 2% on an annualized basis in the first quarter of this year, the fourth straight quarterly slide.

Even without the yen’s recent decline, job insecurity, concerns over an aging population and general economic gloom have left few Japanese in a spending mood.

“I’ve cut down on clothes, kitchenware and most big purchases,” said Masue Mizutani, a mother of three from the industrial city of Kawasaki. “There’s not much good news these days.”

Furthermore, most of the stimulus money being thrown at Japan’s economic problems is earmarked for public-works projects. Such spending reinforces traditional cartel and bid-rigging practices without producing many benefits for consumers.

Another $28.9 billion in planned tax cuts, strongly supported by Washington, is not expected to spur growth any time soon.

“Quite a lot of that doesn’t kick in until next year,” said Jason James, the Tokyo-based research director for HSBC Securities. “Even then, it’s likely that individuals will continue to save, not spend.”

This leaves Japan’s export sector, its one bright spot, pulling most of the weight. Now even Japanese exporters, who benefit from the weak yen, are expressing concern about the strong dollar because of the dangers of rising trade tension with the U.S. and Europe. The U.S. trade deficit with Japan rose 8.8% in March to $5.8 billion.

“As an individual company that exports, it’s favorable for us,” said Kazuyoshi Ishizaka, head of stereo component maker Kenwood Corp. “But for the Japanese economy, further depreciation is not so good. We need to change the structure of the Japanese economy.”

Compared with the early 1990s, Washington has remained relatively quiet about the gap, a change Ron Bevacqua, economist with Merrill Lynch Japan, attributes partly to U.S. prosperity and partly to the fact that Japan is not seen as the economic threat it once was.

That could change, however, if this week’s turbulence on Wall Street proves to be the beginning of a protracted U.S. economic slump, he added.

Meanwhile, U.S. and foreign companies continue to slog it out in the trenches here--never an easy task, no matter the strength of the yen.

At the world’s largest Tower Records store in Tokyo’s trendy Shibuya neighborhood, Teruo Matsuda, a 21-year-old student from Shizuoka, stood beside a giant monster foot promoting the new “Godzilla” soundtrack. American musical recordings now cost about $15, or 10% more than they did a few months ago.

“I’m less likely to buy imported editions these days,” he said.

Some U.S. firms have held the line on prices. But doing so often means cutting costs drastically and reducing or making no profits. Hobart Corp., an American industrial products maker, is paring its local staff through attrition and watching every yen it spends.

“We’re definitely not in a position to raise our prices,” said Rick Davidson, Hobart’s Asia-Pacific vice president.

Others, including some California farm groups, have shifted strategies. The California raisin cooperative was able to resume market growth this year, after a 10% decline in 1997, by introducing organic raisins that are popular with consumers.

But in the end, the most important missing ingredient may be confidence.

“It’s not like the Japanese are running out of money,” said Paul Miller, regional general manager for Qantas Airlines. “We just have to get them back spending again.”

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Times Tokyo correspondent Valerie Reitman contributed to this story.