Yen Is Elbowing Out the Dollar : Strong, Stable Currency Gives Japan Worldwide Opportunities

Earlier this year the Swedish government was preparing a large international bond issue. Advised that a dollar-based offering might not fare well, the Swedes decided to issue yen bonds instead. It was a good choice. The 50-billion yen offering was gobbled up with gusto by international investors.

As an isolated event, the Swedish bonds merited only back-page notice in the financial press. But viewed in the context of larger macroeconomic trends, the story illustrates a momentous change now coming into focus: The world is moving off the dollar standard.

Americans are blithely unaware of what life would be like in a world without the dollar standard. Over the next few years the United States could be forced to surrender its ability to finance foreign debt in its own currency and to import oil at dollar-based prices, as well as other fruits of world financial leadership. The result would be a significant reduction in American living standards.

The current situation of strong yen/weak dollar is not temporary. Currency markets will always experience fluctuation and speculation. But the yen that Washington foolishly launched into the stratosphere at a meeting in 1985 now appears destined to grow even stronger. Among the reasons:

--Currency values are benchmarks of global confidence in the economy underlying them. Japan’s skill at managing three years of a strong yen while keeping its large trade surplus intact, its savings rate high and its domestic economy invigorated, coupled with Tokyo’s dexterity in absorbing last year’s global stock market debacle, makes the yen a beacon of stability in an unstable world.

--The Bank of Japan, once the most active supporter of the dollar’s value, has concluded its mission of buying sufficient time for the restructuring of Japanese exporting industries that were once considered to be potential casualties of a strong yen. Bank of Japan spokesmen now publicly admit what they undoubtedly knew all along: The benefits of a strong yen are numerous. While Washington engages in the backward-looking policy of trying to use its weak dollar to regain marginal competitiveness in heavy industries, Tokyo is using its strong yen to diversify, expand abroad and invest in future-oriented technologies, services and global businesses.

--Similarly, the goal of internationalizing the yen, once opposed by Japan’s Ministry of Finance, now makes sense to Japanese authorities. Horrified by losses suffered in dollar portfolios, Tokyo’s financial community is pressuring the U.S. Treasury to issue yen bonds. Meanwhile, with Japanese industry moving offshore into the newly industrialized countries of Asia, and with those countries in turn exporting more and more to Japan, a yen economy is spreading throughout the Pacific Rim. All these factors generate wider use, and ultimately greater demand for yen, bolstering the currency’s upward tendency.

--Because of the continuing magnitude of the U.S. trade imbalance, the world is awash in dollars, weakening demand to acquire more of them in currency markets and thus eroding their value further. The global appetite to hold dollars has become tempered by reluctance to rely so heavily upon a key currency issued by a government whose Congress has shown a proclivity for protectionism and whose White House has shown a proclivity for profligacy.

Economists on both sides of the Pacific and in Europe recognize the need for an alternative to the dollar standard. They talk of “currency baskets,” some sort of joint dollar/yen/deutsch mark standard, or a “new Bretton Woods.” These ideas make econometric sense but ignore realities of the marketplace, not to mention human psychology. With Japan already the top global investor and lender, with Japanese business increasingly setting the agenda for world trade, with so many foreigners either trying to attract Japanese capital or crack the Japanese domestic market, the yen will inevitably exert a preponderant weight over other currencies.

As the reality of Japanese financial power unfolds, Americans now content to argue with Tokyo about relatively peripheral economic issues like beef and citrus exports will be attracted to far more substantial issues with far-more dangerous repercussions. Indeed, a financial war could supersede today’s trade war. Early warnings are already visible in congressional attempts to prohibit Japanese investment firms from acting as primary dealers in government securities and in the suggestion by Honolulu politicians that foreigners be barred from acquiring residential real estate.

If recent experiences in the trade war are any guide to the future, American policy-makers are likely to maintain their confidence in the ultimate supremacy of U.S. financial leadership until it is too late. They will continue thinking of Japan’s strong yen, large trade surplus, high savings rate, zooming financial markets and rapid acquisition of prime global assets as aberrations, about to change at the next turn of circumstances.

Only when it becomes clear that the 21st Century is dawning on a yen-dominated world will they realize what has happened. Not only will Japan be the world’s strongest financial economy, but financial power itself will by then have asserted its primacy over natural resources, industrial capacity and even weapons systems as the principal lever for projecting global influence amid the high-tech, high-velocity opportunities of the Information Age.