SURVIVING THE ERA OF THE WEAK YEN
Forget quick fixes.
Asia is on its own as the yen heads toward 150, 155, 160 . . . against the U.S. dollar
By Jonathan Sprague
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Bad Company The Yen's fall has dragged other Asian currencies with it
THE WINDOW OF OPPORTUNITY is closing. Back in June, Washington and Tokyo intervened in currency markets to pull up the yen from a then eight-year low of 146 to the dollar to 135. That was supposed to buy Japan time to get its house in order. Less than two months later, the yen crashed through the 147 barrier. Last week, it pulled back to 144 on expectations that the Bank of Japan may buy yen again. But intervention can do only so much. The message to the rest of Asia: Don't get your fingers caught as the window shuts, because the era of the cheap yen appears here to stay.
A nation's currency reflects its economic fundamentals. It is the outward expression of what investors and foreign exchange traders expect from political leaders and their management of the economy. The view of the markets these days is clear - the yen is a "sell." Japan is in recession, returns on most Japanese assets are pitiful, and Tokyo seems caught in a political Bermuda Triangle out of which no credible economic policy will emerge soon. All bad news for Asia, because a sinking yen threatens to pull regional currencies, markets and economies down with it. Counsels John Wadsworth, chairman of Morgan Stanley Dean Witter Asia: "Anybody running a company or a country in Asia should design his strategy so he can do without a helpful Japan for some period of time."
The main concern is that the yen's further decline may force Beijing to devalue the yuan. That may break the Hong Kong dollar's peg to the U.S. dollar, and spark another round of competitive devaluations throughout the region. Analysts say the Japan-U.S. yen intervention back in June was largely motivated by Chinese warnings that Beijing may be forced to abandon its pledge to maintain the yuan's value. There are strong arguments against a yuan devaluation - and against the collapse of the Hong Kong peg if the renminbi does go. Tell that to investors. "People are looking at 150 yen to the dollar as a trigger point," says Simon Flint of consultancy I.D.E.A. in Singapore. "That doesn't represent much of a depreciation from present levels, but people see it as offering a kind of watershed for China, a point at which they can start excusing [a devaluation of the yuan]."
The yen's weakness is showing up in myriad ways, says Rob Subbaraman, a regional economist with Lehman Brothers in Tokyo - in Japanese imports, cross-border bank lending, direct investment and tourism. The only thing rising is the competitive edge of Japanese products. The numbers make for dire reading. Thailand's exports to the U.S., its top market, in the first half of 1998 rose 13.3% year-on-year, but shipments to Japan, its No. 2 buyer, dropped 16.4%. Overall, Japanese imports from the rest of East Asia in the January-to-June period fell 17.7% compared to the previous year. Asia's export-led recovery is disappearing down Japan's black hole.
The Japan Travel Bureau, the nation's top travel agency, says the number of tourists leaving the country during the one-week "Obon" summer holidays in August will shrink for the first time in 18 years, part of an overall 2.4% decline for the months of July and August. Many Asian destinations have seen far more precipitous drops, with Japanese arrivals in Hong Kong cut in half. Japanese corporations investing abroad are also finding that their yen buys much less these days. The Economic Planning Agency expects direct overseas investment by Japanese firms for the year to March 1999 to plunge 56.6% year-on-year, due to the yen's depreciation and caution about Asia's economic outlook.
How much of the problems are caused by the sluggish Japanese economy as opposed to the falling yen? The two cannot be separated. "The yen is weakening because the Japanese economy is perceived to be weak," says Tim Condon, a regional economist with Morgan Stanley in Hong Kong. "And a weaker Japanese economy means that recoveries in Asian economies are going to take longer, so that translates into somewhat weaker [Asian] currencies." What about the argument that the yen's fall should not spark competitive devaluations because Japan's high-tech exports do not clash with the rest of Asia's lower-tech offerings? The problem, says I.D.E.A.'s Flint, is while most Asian products may not compete directly with Japanese goods in third markets, Japan does compete with Korea, which competes with Taiwan, which competes with Singapore, and so on.
Koreans are already hurting. If the yen stays below 140 to the dollar, Kim Nae Myung, executive managing director for exports at Hyundai Motor, expects trouble: "We would lose the 5% competitive edge in pricing for [entry-level] subcompact cars in the global market." At 150 to the greenback, says Samsung Electronics, exports of Korean consumer electronics to Europe may decline because Japanese products will become more competitive. Shipbuilders have orders until 2000, but if the yen remains weak in the next century, the Koreans will have a fight on their hands.
There are thin slivers of a silver lining. Asia is dependent on Japan for capital equipment and components, so a weak yen means Asians buying such Japanese goods should find them cheaper. Philippine central bank governor Gabriel Singson points out that half of his nation's imports from Japan consist of items such as machinery, vehicles and telecommunications equipment that add to productivity, especially that of its dollar-earning exporters. "A decline in import cost may also help contain the inflationary pressures brought about by the sharp depreciation of the peso against the dollar," he says. The lower value of yen debt held by Asian nations slashes millions of dollars from the amount they must repay - Singson says 22% of his country's $45 billion debts are in yen, so every 1% drop in the yen's value results in savings of about $100 million.
Unfortunately, the silver is tarnished for some countries. Malaysian special minister for the economy Daim Zainuddin notes that even as the Japanese yen fell against the dollar, the ringgit depreciated even more. Compared to the start of the crisis in July 1997, the yen has appreciated 33% against the Malaysian currency. So while Malaysia may pay fewer dollars to buy Japanese goods or repay Japanese loans, it has to pay more in ringgit. Analysts also point out that demand in most Asian nations is so bad that few importers are in a position to buy from Japan. And many Japanese exports, particularly components that will end up in products headed for the U.S. and Europe, are priced in dollars anyway.
So what can Asia do to cope? Not much. "You grin and bear it," says I.D.E.A.'s Flint. About the only thing within the control of Asian nations is to cut local costs - meaning fewer employees and lower asset prices. Exporters can also look for other markets. That means the U.S. and Europe. The problem is that everyone else is eyeing those markets too. And the switch requires redesigned products and new sales channels. Counsels Kim Yong Ho, an executive director of Korea's Daewoo Corp.: "All export contracts should be based in dollars because the yen will remain volatile for some time. If exports are based in yen, the risk should be hedged."
So far, the possibility of an encore intervention has prevented currency traders from pushing the yen beyond the 144-to-146 range. But no one expects it to stay there. "We know how reluctant the U.S. secretary of the Treasury was to agree to the [joint] intervention [in June]," says Wadsworth. "I would be very surprised if there was another one involving the U.S. government." Morgan Stanley expects the yen to hit 160 to the dollar by the end of the year. Merrill Lynch sees it going to 170 over the next 12 months. Currency traders talk of 180 and beyond. Few hold out hopes for a quick turnaround. "The mechanisms are in place to deal with Japan's banking [and other] problems, but the devil is in the details and legislation needs to be passed," says Wadsworth. "And then you have to put into place the human resources that are qualified to actually deal with the change." MPs are meeting in a special session. Opposition legislators vow to force the new government of Prime Minister Obuchi Keizo to toughen the proposed measures, which could delay their passage.
So is there hope for Asia? There was panic when the yen broke through 146 to the dollar in June. The response was more measured when it pushed past 147 in August. The difference is changed expectations and speed. "The level of the yen is less important that the volatility and the rate at which it is falling," says Morgan Stanley's Condon. "When expectations become unsettled, then it's a more difficult adjustment than when the yen grinds down on a daily basis." In other words, if the yen slowly edges past 150 to the dollar, China will likely keep its promise to hold the line on the yuan, regional currencies may not domino down, and everybody will adjust to a bleaker but tolerable new reality. Asia can only hope this is what happens - while it builds up its tolerance by taking the poison every day, a bit at a time.
- With reporting by Antonio Lopez/Manila, Santha Oorjitham/Kuala Lumpur and Laxmi Nakarmi/Seoul
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