re: The weaker dollar is the main mechanism I am expecting to be at play in the second dip of my expected W of US economic activity:
December 28, 2001 NY Times
The Yen's Relentless Downhill Slide
By JAMES BROOKE
TOKYO, Friday, Dec. 28 — The Japanese yen keeps falling, affecting business, trade and tourism in increasingly powerful ways.
As Japanese officials systematically nudge their currency lower, the yen fell on Thursday to about 132 to the dollar, the 11th straight day of losses and the longest losing streak since 1971. The currency has lost nearly 7 percent of its value this month alone. On Jan. 3, 2000, the yen was at 101.45 to the dollar.
Japan once again seems to be trying to fight its way out of a recession — its fourth in a decade — by devaluing its currency and therefore increasing exports. A cheaper yen makes Japanese products more competitive on world markets.
Indeed, Tokyo's stock market, which had slumped by about 25 percent since the start of the year, leaped 2.6 percent Thursday on news of the yen's latest fall. Major exporting companies led the gains, as a weak yen instantly adds millions of dollars to the profit margins of major exporters like Honda Motor, Toyota Motor (news/quote), Canon and Sony (news/quote).
But a weaker yen will also affect Japanese consumers, slowing a recovery of tourist visits to the United States and making imports more expensive. With imported beef costs rising, McDonald's (news/quote) Japan operation announced last week that it was raising prices on some hamburgers.
A weaker yen will add to mounting concerns among exporters, who fear that the dollar has become so strong that they are being priced out of many foreign markets.
Automakers are especially sensitive to the value of the yen, particularly at a time of recession, when price competition has grown.
But a wide range of manufacturers, like those that make appliances, electronic goods, steel and heavy equipment, see themselves as losing both domestic and overseas customers if Japanese companies gain a big price advantage.
Business lobbyists, including the National Association of Manufacturers, have pressed the Bush administration for months to intervene in the market to lower the value of the dollar and help exporters. But the Bush administration has taken no such action and appears inclined to let the market set the dollar's value.
Treasury Secretary Paul H. O'Neill had criticized the official mantra of the Clinton administration, saying Mr. Clinton favored a "strong dollar." But when markets reacted to Mr. O'Neill's comments by anticipating a decline the dollar's value, he retracted his comments and has since largely refrained from speaking about currency values at all.
In Asia, Chinese and South Korean officials have urged Japan not to set off a "beggar thy neighbor" round of devaluations that would impoverish the region. With memories strong of the 1997 currency crisis, the governments of South Korea, Taiwan and Singapore have allowed their currencies to drift to multimonth and multiyear lows.
China, with $200 billion in foreign currency reserves, appears to be trying to talk the Japanese into stopping the decline, rather than preparing for a devaluation of China's currency, the yuan.
The yen's decline to its lowest levels in three years comes as Japan runs out of tools for an easy fix to its economy, which is expected to shrink in 2001 and 2002.
With most Japanese enjoying high living standards, politicians have shied away from taking painful measures to create future growth: deregulation of the economy, large- scale privatizations or decisive action against a rising mountain of bank debt. Instead, in a typical move, a "top member" of the ruling Liberal Democratic Party briefed Japanese reporters on Thursday, under the cloak of anonymity, that "the acceptable level is probably some 140 yen" to the dollar.
But a continued fall in the yen could accelerate an exodus of foreign investors from Japan's stock markets. In the week ended Dec. 14, foreigners pulled a net $3.7 billion out of Japanese stocks.
Bush administration officials, in Washington and in Tokyo, bluntly warned this month that real growth will return to Japan's economy only with deregulation, privatization and a major banking cleanup.
Today, Japanese news services reported that Ishikawa Bank, a regional bank, was filing for bankruptcy, the first Japanese bank failure in two years.
With Japan serving as customer or supplier — and increasingly, both — for so many American manufacturing companies, the yen's devaluation is certainly cause for consternation.
"Japan's sales represent about a billion of our $28 billion-plus revenues, so the devaluation of the yen is viewed as a modest negative for us," Irvin Lipp, a spokesman for DuPont, said.
Japan imports lumber, pulp, packaging materials, newsprint and other commodity paper products, primarily from North America.
"Prices will increase in Japan, and of course that can impact us down the road," said Frank Mendizabel, a spokesman for Weyerhaeuser (news/quote). "And almost all our products are sold in dollars, so we can't hedge against the price of a currency."
Companies that both import from and export to Japan seem the least concerned, in that their businesses have a built-in natural hedge against currency fluctuations. David Frail, a spokesman for General Electric (news/quote), notes that G.E. buys and sells products in Japan directly, and also buys numerous products that include parts made in Japan. "With multiple transactions like this, the effect of differences in currency is indiscernible," Mr. Frail said.
Of course, many companies may be more worried than they will publicly let on. After all, many manufacturing companies have blamed this year's disappointing earnings on the strong dollar. But few are ready to say they will have to again revise earnings estimates downward because of this.
The plummeting yen is even less of a threat to the growing number of American companies that do their Japanese business through alliances with Japanese companies. Goodyear Tire and Rubber (news/quote), for example, owns only 25 percent of its operations in Japan; Sumitomo Rubber Industries owns the other 75 percent.
In Detroit, a weak yen is seen as giving an edge to Japan's Big Three — Toyota, Honda and Nissan Motor. These companies can make more profit, in yen, by charging the same prices in United States dollars.
Next year, many analysts expect a sharp falloff in auto sales and an excess of capacity, which will create pressure for further price cuts. The currency imbalance means Japanese automakers will have even "more ammunition" when it comes to pricing, and the American Big Three will have none, according to Rod Lache, an analyst at Deutsche Bank (news/quote).
Currencies aside, earlier this year Mr. Lache estimated that Japanese automakers could charge $3,000 more per vehicle than their American counterparts because of their vehicles' better quality ratings, better brand strength and higher residual values, among other factors. And since Sept. 11, the Big Three have been offering interest-free financing deals, increasing their costs.
A continued weakening of the yen, on top of all that, does not leave the Big Three with much wiggle room on pricing.
Not all analysts agree that currencies are such a significant problem. "I think the Big Three's problems are 10 percent currency and 90 percent product," said David Healy, a financial analyst at Burnham Securities. Mr. Healy pointed out that about two thirds of the vehicles Toyota, Honda and Nissan sell in the United States are assembled in North America, which significantly blunts any yen advantage.
But Mr. Lache said that most of the auto parts in Toyotas, Nissans and Hondas come from Asia, meaning the currency imbalance is still "a significant negative."
The weakening yen is expected to retard a recovery in Japanese tourism to the United States, which plunged after the terrorist attacks of September. For much of the last decade, the United States has been an increasingly popular destination for Japanese tourists despite the malaise in the Japanese economy.
In an October forecast, the United States Commerce Department estimated that the number of Japanese tourists to the United States would fall 21 percent in 2001 from last year's level of just over five million.
Since most local employees are paid in yen, the slide in the currency will not help American companies operating there, said David Malpass, an international economist at Bear, Stearns. And rents, while cheaper, are still expensive.
It is possible, however, that the currency's renewed weakness will encourage potential buyers to take a fresh look at Japanese companies, much as the Asian financial crisis did in 1997 and 1998.
"Things are cheaper, which creates opportunities for nimble foreign operators," Mr. Malpass said. |
