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High Yen Helps Japanese Consumers in Theory, But Will It in Practice?

April 29, 1993

TOKYO (AP) _ With the yen sky high, theory says Japanese consumers should be enjoying a windfall from cheap imports, slashing Japan’s huge trade surplus as they buy more Cadillacs and Gucci bags.

In the real world, much of the windfall never reaches consumers.

Japan, worried about the effects of the yen’s rise on its recovery, will raise the issue today at a meeting in Washington of finance ministers from the Group of Seven leading industrialized nations.

Economists say many old staples of U.S.-Japan trade wrangling - such as Japan’s complicated distribution system - give grounds for pessimism about how much a strong yen will boost imports.

If the pessimists are right, it would be an ironic end to the current bout of yen-buying, which exploded after President Clinton on April 16 named ″appreciation of the yen″ first on the list of ways to reduce the $49 billion U.S.-Japan trade imbalance.

The yen hit a record 109.25 to the dollar in New York on Tuesday before intervention by the U.S. Federal Reserve held it in check.

Clinton’s reasoning was based on simple economics. Until February the yen was trading at about 125 to the dollar, meaning an importer would have to spend 1,250 yen to buy a $10 widget.

But in two months the yen has appreciated to around 110 against the dollar, meaning the Japanese widget importer can buy the same item for 1,100 yen. The difference of 150 yen can be passed on the consumer, giving imported widgets a price edge over their Japanese rivals.

Why doesn’t that always happen?

″The first reason is that the distribution system is complicated. Between producer and consumer there are many levels, so the high-yen merit gets siphoned off,″ said Masaru Takagi, head of economic research at the Fuji Research Institute.

American businesses have often criticized that system, saying the many levels of tradition-bound wholesalers act as a barrier to imports.

A strong yen also tends to make Japanese products more expensive and less competitive overseas, hurting Japanese exporters. Economists say that could damage Japan’s fragile economic recovery and cause consumers to buy less of everything, including foreign products.

Japanese consumers also won’t be getting refunds from power companies, who say higher oil prices and the possibility of the yen weakening in the future prevent them from lowering prices now.

But Japan isn’t the only one at fault, Takagi and others say. Foreign makers also often prefer to capture the profits from a rising yen immediately, rather than passing the benefit on to the consumer and aiming for a long-term gain in Japanese market share.

When Walden Rhines, vice president of semiconductor giant Texas Instruments, was asked last week whether his company would use the higher yen to cut prices here, he responded: ″We try not to.″

According to the government’s Economic Planning Agency, when the yen doubled in value against the dollar between late 1985 and 1987, importers benefited by 33.6 trillion yen ($300 billion). But only 24.2 trillion yen ($216 billion), or 72 percent, was passed on to the consumer.

That might produce an outcry from aggrieved shoppers elsewhere, but not in Japan, said Takamitsu Sawa, an economics professor at Kyoto University.

″Even if prices don’t go down, Japanese consumers don’t complain a bit. They are very immature,″ he said.

Some Japanese may be awakening, however, especially since news of the yen’s rise is regularly the top story in newspapers and television.

″I go abroad four or five times a year on business, and everyone who does that knows Japan is too expensive. It’s crazy,″ said Yoichi Kobayashi, a shopper at a supermarket in Tokyo’s Ginza district that features many imported items.

Ito-Yokado, a major department store and supermarket chain, says it held sales on imported goods last month and this month - early in the yen’s climb - because of pressure from shoppers. Among the price cuts: super-premium vanilla ice cream went from 700 to 400 yen ($6.25 to $2.60).

″The direct merit from a higher yen comes two or three months later, but because customer expectations were high we made the effort to do the sale″ right away, said spokeswoman Kazuko Itakura.

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