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Rising Yen Squeezes Japanese Economy

March 28, 1987

TOKYO (AP) _ The rise of the yen, engineered to help ease foreign trade frictions, is confronting Japan with a painful bout of stagnation at home as the economy reduces its traditional emphasis on exports.

The stronger yen has brought record unemployment, lower production and declining investment in many industries, problems that could work against Western demands for still stronger measures to correct trade imbalances.

Along with West Germany, Britain and France, Japan agreed with the United States in September 1985 that the dollar should fall further to make U.S. goods cheaper overseas, helping boost American sales and cut imports to reduce the U.S. trade deficit.

Japan then agreed to allow more foreign imports as well as restructre its economy to lessen dependence on exports in favor of expanded domestic spending in fields such as housing.

The yen’s subsequent 60 percent rise against the dollar has not yet translated into reduced trade surplus figures, however - partly because the resulting Japanese slowdown has blunted demand for foreign goods and for domestic growth sought by trading partners.

The U.S. trade deficit with Japan in 1986 hit a record $58.6 billion, up from $49.7 billion in 1985. Japan’s surplus with the European Economic Community was $16.69 billion, up 45 percent from 1985, and the European trade bloc says Japanese exports have simply been diverted from the United States to Europe.

But Japanese officials note the yen’s rise has masked an actual fall in the volume of Japanese exports and a sharp rise in imports, which they say will show up in trade balance figures only after exchange rates stabilize.

The changes already are causing hardship in Japan.

The government said in early March that the jobless rate had reached 3 percent in January, the first time unemployment had exceeded the 2 percent range since records were first kept in 1953. Reports of large layoffs have become commonplace.

″It is getting serious,″ Prime Minister Yasuhiro Nakasone told reporters.

The seasonally adjusted unemployment rate had remained stable since September 1985′s 2.7 percent until last October. Then the rate began climbing steadily as the yen’s rise began to be felt.

While the 0.1 percentage point rise in January was small, the psychological impact of hitting 3 percent was significant, prompting some people to ask whether Nakasone’s government is doing enough to offset the slip in exports.

Yoshikatsu Numada, secretary of the 4 million-member General Council of Trade Unions, the nation’s largest labor movement, said in an interview: ″The government will have to improve the country’s overall economic environment by stimulating domestic demand and reducing exports. There’s no other solution.″

Numada noted predictions that unemployment could reach 4 percent late this year or early in 1988 unless the yen weakens. He said Japan’s traditional labor-management cooperation alone would not solve the problem ″now that it has reached a danger level.″

The current exchange rate ″isn’t a desirable rate for Japanese workers to survive,″ he said. ″The dollar should be much stronger than it is today.″

A dollar bought 240 yen 18 months ago. It fell below 150 yen this past week to its lowest level since the late 1940s.

Although the jobless rate still is the lowest among Western industrial countries, it would be higher if calculated by U.S. or European methods. In Japan, military personnel and all those working one hour a week or more are considered employed.

The Japan Development Bank reported in March that investment in manufacturing is expected to fall 7.1 percent in the fiscal year that begins April 1, after two years of sharp increases.

Export-oriented manufacturing industries have been hit hardest. Shipbuilding and steel companies have announced plans to cut 68,000 people from a work force of 217,000. Some non-exporting industries such as textiles and lumber also are suffering from the yen’s rise because imports have become cheaper and local goods less competitive.

Corporate profits fell 22 percent in the final three months of 1986, according to government figures.

Makoto Kuroda, director general of the Ministry of Trade and Industry’s Trade Policy Bureau, said at a recent news conference, ″Although we’re very much pleased that the yen has strengthened, the process has been too fast.″

Exports dropped 15.9 percent in 1986 in yen terms and 1.3 percent by volume, and probably will decline somewhat further this year, according to a MITI report in early March. Imports fell by 30.6 percent in yen terms, reflecting the stronger buying power of the yen, but rose 12.5 percent by volume and will ″grow substantially (in 1987), owing to the spreading effects of the yen’s depreciation,″ the report said.

″This was the first time in the post-war period (since 1945) that Japan experienced such a sharp decline in exports″ in yen terms, the report said.

Mikihiro Hayashi, a MITI spokesman, said the ministry will complete a five- year plan in June ″aimed at restructuring Japan’s economy through higher economic growth, domestic expansion and decrease of exports.″

The plan, scheduled to start in fiscal 1988, incorporates aspects of last April’s report to Nakasone by a panel led by former Bank of Japan Governor Haruo Maekawa on ways to encourage domestic consumption. The plan emphasizes improved housing, shorter working hours and more spending on leisure.

That would follow a three-year ″action program″ begun in 1985 to remove barriers to imports, long a sore point for Western governments.

Japan also reduced its official discount rate, already the lowest in the Western world, from 3 percent to 2.5 percent in February to encourage spending and investment. The cut was the fifth since January 1986 in the loan rate charged by the central bank to commercial banks.

End Adv Weekend Editions March 28-29

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