../../../MY_DOC%7E1/MY_DOC%7E1/ECONNEWS/South-Western%20College%20Publishing%20-%20Economics  
What Once Was A Tiger
Subject Exchange Rates
Topic International Finance, Productivitiy and Growth
Key Words Recession, International Trade, Interest Rates, Economic Growth
News Story

Japan's trade surplus is growing as a result of the falling value of its currency, the yen. In January 2000, the yen traded at 101 to the dollar, the yen/dollar exchange rate is currently about 130 yen to the dollar. In times past, a weak yen would have garnered the cries of U.S. manufacturers for measures to weaken the dollar. Although there are a few voices, such as U.S. automakers, petitioning the government for protectionist measures, by and large U.S. manufacturers have been silent about the weak yen. U.S. policymakers believe that the weak yen will help Japan recover from recession and a healthy Japanese economy will promote global growth.

Japan's economy is extremely weak. Plagued by recession, deflation, burgeoning budget deficits and a banking sector that is on the verge of imploding, Japan's economy could collapse and bring on a global recession. It is in the U.S.'s interest to see Japan, the world's second largest economy, regain its footing. A weak yen promotes exports and there is some evidence that an export-led recovery may be occurring in Japan. Japan's trade surplus soared to $8.1 billion, while industrial production rose 1.2 percent in March. Deflation, which has led to a record numbing of bankruptcies, has eased somewhat. Wholesale prices fell only 1.3 percent in March compared to 1.5 percent in January.

One reason that a weak yen is no longer of such concern is that head-to-head competition between U.S. and Japanese firms has declined considerably. According to one report, the U.S. competes with only 21 percent of 10,000 manufactured goods imported from Japan or China.

China, another of Japan's important trading partners, is also not raising concerns about the weak yen. Rather, China is benefiting directly from Japanese expansion as China's low labor costs have resulted in Japan's building much of its new productive capacity there. China had a $27 billion trade surplus with Japan last year.

There are some dangers to a weak yen policy. A recovery could divert attention of Japanese policy makers away from needed reforms, especially in banking. In 1997, a weak yen helped spark a string of devaluations in Asian countries. While those countries are stronger today, devaluations cannot be ruled out.


(Updated June 1, 2002)

Questions
1. How does a weak yen encourage Japanese exports? How could increased exports spark a recovery in Japan?
2. If the U.S. were concerned that the yen was too weak, what measures could be adopted to depreciate the dollar?
3. What U.S. firms might be hurt be a weak yen? What U.S. firms might benefit?
Source Robert A. Guth, Michael M. Phillips and Charles Hutzler, "As the Yen Keeps Dropping, A New View of Japan Emerges," The Wall Street Journal, April 24, 2002.

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