Falling Nikkei Index Continues to Drive Down Yen

TOKYO —  Tumbling stock prices in recent weeks have boosted pressures for a weak yen--and that in turn may be setting the stage for a sharp expansion of Japanese exports and a resurgence in the nation’s trade surplus, analysts here say.

The steep fall in the Nikkei index means interest rates will stay low, the Bank of Japan will continue to boost the money supply, and capital will keep flowing overseas from Japan--and “that means the yen will keep depreciating,” predicted Ronald Bevacqua, an economist at Merrill Lynch Japan Inc.

The dynamic now at work in the Tokyo stock market thus may redound to the benefit of many of Japan’s most famous manufacturers, since a weaker yen helps Japanese exporters.

“I think the yen’s value is already reaching a level which is making Japanese companies that compete in international markets extraordinarily competitive,” Russell Jones, chief economist at Lehman Brothers Japan Inc., said Tuesday. “This period when Japan’s trade surplus is coming down is essentially over. It’s going to rise in 1997.”

The dollar hit a 46-month high of 118.28 yen in Tokyo on Tuesday, up a dramatic 48% from its post-World War II low of 79.75 reached in April 1995. After another decline Tuesday, the 225-share Nikkei index rallied nearly 512 points, to 17,870.03, by midday today.

The government vows it won’t repeat its past interventions to prop up stock prices, and remains committed to low interest rates. Given those policies, Bevacqua said, “one can’t help but come to the conclusion that they’re trying to export their way out of their problems.”

Some analysts believe that exports are already building up so much steam that the yen may start strengthening later this year, despite today’s extraordinarily low interest rates in Japan.

But trade flows lag many months behind the exchange rate changes that influence them. Thus, analysts say, the yen’s current weakness virtually ensures an export boom in 1997.

Since last fall, the stock market has been buffeted by contradictory influences. It has seen a weakening yen, which normally helps stock prices rise. But the greater factor has been fears that tax increases planned for April 1 will slow economic growth.

The market has also been affected by Prime Minister Ryutaro Hashimoto’s promises of broad deregulation, which would eventually confront banks and many domestic-oriented industries with unprecedented levels of open competition.

Such competition may be good for Japan in the long run, but in the short term it threatens inefficient firms with declining profits and even potential bankruptcy. And those firms are the ones whose stocks are tumbling.

By contrast, the stocks of big-time exporters such as Toyota and Canon have held up relatively well.

Falling stock prices could slow the country’s modest economic recovery by depressing corporate capital investment and consumer spending. In order to counter that risk, the Bank of Japan has indicated it will keep interest rates low.

Low rates, in turn, weaken the yen because Japanese investors can get better returns by putting money overseas in foreign stocks and bonds, and to do that they need to sell yen and buy dollars.

Thus, blue-chip Japanese exporters are reaping a profit bonanza at the same time as they are trying to expand global market share. For example, company spokesmen said Tuesday that for each yen the Japanese currency weakens against the dollar, net annual profit rises $25 million at Honda Motor Co., $127 million at Toyota Motor Corp., $17 million at Canon Inc. and $8 million at Fuji Photo Film Co.

And exporters, notably auto makers, aren’t just taking the benefits of a weaker yen in profits. Many are keeping profit margins fairly thin, and cutting foreign prices to defend or expand market share.

Between April 1995 and November 1996, Bevacqua said, Japanese exporters overall took only 45% of the benefits from yen depreciation in higher profits and plowed 55% into lower prices for foreign customers, in a bid “to maintain or increase market share.”

That spells stiffening competition for foreign companies, notably U.S. auto makers. They have already begun losing ground to Japanese-based companies as the yen has declined, enabling Toyota, Nissan, Honda and others to cut prices after being undercut by Detroit for many months.

Some analysts think Japanese exporters are already doing so well that, despite low interest rates in Japan, another reversal toward a stronger yen will begin fairly soon.

“The authorities here--the government and the Bank of Japan--are reluctant to see the yen weaken further,” Jones said. “Their feeling is, ‘The move from 80 to 110 or 115 was enough to do what we wanted to do.’ I think they feel further weakness is not needed to keep the economy growing . . . [and in the United States] the current level is pushing the threshold of pain.”

Indeed, Japanese Finance Minister Hiroshi Mitsuzuka told reporters Tuesday, “I think the yen’s weakness has gone too far.”

However, many analysts believe the government’s hands are tied by the recent fall in stock prices, with its threat to chill Japan’s economic recovery. The Bank of Japan presumably wouldn’t dare raise interest rates in a bid to strengthen the yen, because higher rates could choke off the capital investment that the recovery depends on.