Agreeing to Boost the Yen

By Alexander L. Taylor III

The U.S. and Japan put together a currency deal

When American businessmen complain about unfair Japanese competition, high on their gripe list is the value of the yen. Many executives contend that restrictions in the Japanese financial system have kept the yen artificially cheap compared with the dollar, and thus have made it easier for Japanese manufacturers to keep prices low when selling their products abroad. In a speech in Detroit earlier this month, Chrysler Chairman Lee Iacocca declaimed, "The Japanese yen is undervalued by at least 15%, and everyone in Washington agrees on that."

Heedful of these complaints, the Reagan Administration has been trying to coax the Japanese into allowing the yen to rise in value. The task has not been easy. As one American economist points out, the Japanese Finance Ministry "likes to study every issue for a decade or so." But now, after a series of meetings in Washington, Tokyo, Hawaii and Rome, a deal appears to have been struck. It is expected to be announced this week.

The latest initiative toward boosting the yen began last fall. Meeting in Tokyo, President Reagan and Japanese Prime Minister Yasuhiro Nakasone pledged to seek ways to end economic friction, particularly concerning the value of the yen. But little progress was made until the end of March, when Treasury Secretary Donald Regan went to Tokyo and bluntly scolded the Japanese at a fist-thumping news conference.

The tough talk apparently made an impact. So did the U.S. suggestion that a greater role for the yen in world finance would mean that Japan would become the second largest shareholder in the World Bank, a prestigious position long sought by the Japanese. At a meeting of economic officials in Rome last week, the two nations wrapped up most of the final details for an agreement.

The deal extracted by the U.S. is based on the theory that if the yen becomes a more freely traded international currency, its price will go up. Despite Japan's size and enormous trading balances (1983 merchandise surplus: $31.6 billion), the yen is not easily used in international finance. Japan's central bank restricts overseas lending and controls the interest rate on yen deposits. As a result, the yen accounts for only about 3% of the currency reserves held around the world; some 85% are in dollars and the rest in West German marks.

Although the precise terms of the agreement have not been made public, Japan is believed to have freed the yen to make it more available for trading on international currency markets. Tokyo will also reduce restrictions on the outflow of the yen and improve the access of foreign banks to the Japanese money market. That means other nations can reduce some of their dollar holdings and start acquiring yen deposits, which should drive up the currency's price in the process.

In addition to liberalizing regulations affecting the yen, Japan seems more willing to open up to foreign companies. Since 1945 U.S. corporations have been able to invest only $2 billion in Japan, while the Japanese have invested about $14 billion in the U.S. Easing restrictions will make it simpler for U.S. businessmen to operate in Japan, as well as allow foreign firms to tap Japan's relatively cheap capital markets. Officials on both sides hope that President Reagan and Prime Minister Nakasone will be able to sign a yen agreement in London at the June economic summit.

Even if the accord is completed as anticipated, there is some doubt whether the measures will achieve their desired purpose. Treasury officials concede that internationalizing the yen could have the short-term effect of further weakening it. Moreover, despite earlier attempts to increase U.S. exports to Japan or slow down Japanese imports, Tokyo's trade surplus still grows. Said American Motors Chairman Paul Tippett last week: "The negotiations are encouraging, but I've learned to be cautious when expecting progress from the Japanese." --By Alexander L. Taylor III. Reported by Christopher Redman/Washington and Edwin M. Reingold/Tokyo

With reporting by Christopher Redman, Edwin M. Reingold