Rebounding yen makes Japan No. 2 as world financial power

Japanese cars are hurting Detroit. Japanese products have grabbed much of the market for consumer electronic goods. Now there's a relatively new invasion: Japanese money.

Tokyo has rapidly become the second-largest financial market in the world, after the United States, with assets exceeding London's.

``You are in the midst of an epochal shift in economic power,'' maintains Sam Nakagama, an economic consultant in New York.

Wall Street has been feeling Japanese financial might for at least a year. During the Japanese fiscal year that ended March 31, it is estimated that as much as $80 billion of Japanese money flowed abroad, much of it to New York but also to the Eurodollar market.

This flow of Japanese money, taking advantage of high interest rates in the US as compared with Tokyo, was one reason the yen remained so weak for such a long time in the face of huge US trade and balance-of-payments deficits. Japanese investors were using yen to buy dollars, thus propping up the dollar's price.

Now Wall Street financiers fear the reverse will happen. Japanese investors -- insurance companies, brokerage houses, trust companies, and so on -- will either stop adding any more to their American investments or start selling off some of that portfolio.

In fact, Toshihide Mizuno, an economist with Sanwa Bank in New York, suspects that Japanese investors have within the past two weeks reduced the amount of their investments in the US. They are afraid the dollar will plunge further in relation to the yen, reducing the value of any dollar investments.

No statistics are yet available to prove that.

But the effect of this shift in either sentiment or actual investment flows has been a drop in bond prices in those two weeks.

``In some sense, the United States has lost its financial independence,'' Mr. Nakagama says. ``We can't finance our economy without this Japanese money. They are broadly determining our interest rates.''

That thesis hangs on an economist's concept of the Japanese as the key ``marginal'' suppliers of capital in the US. The ultimate users of money, nonfinancial borrowers, have been borrowing money at around a $800 billion annual rate. So the Japanese flow in the tens of billions is big enough to be important.

``They fill the gap because our savings rate is too low,'' Nakagama says.

This Japanese-American economist may have had something to do with the shift in Japanese investor sentiment. His economic analysis is read by 20 or so Japanese institutions that are the largest Japanese investors in this country. Three weeks ago, Nakagama forecast a turnaround in bond prices. If his Japanese readers took him seriously and reduced their US investments, his forecast could have been self-fulfilling.

Many people are probably not aware that Japanese financial institutions have passed in importance their British or French or German counterparts.

Some 40 Japanese banks operate in this country, most of them simply with representative offices that try to stir up business for their home offices. But some 15 have branches or agencies that do business directly in this country.

Mr. Mizuno's bank, Sanwa, is Japan's fifth largest, about ninth largest in the world -- an indication that Japan's key financial institutions are global giants.

Major Japanese brokerage houses have offices in the US, including Nomura Securities, which is bigger than Merrill Lynch. Nippon Life Insurance Company, Japan's biggest, has a New York office.

As for the future, Mizuno expects Japanese financial institutions to resume investing more money in the US once the yen-dollar exchange rate shows signs of stabilizing. Others on Wall Street have been speculating about a shift of Japanese money from bonds into US stocks.

Nakagama worries that the US will pile up huge external debts while the Japanese build up assets. Morgan Guaranty Trust Company estimates that, under favorable circumstances, the US net-liability position could climb to $442 billion by 1990 as its international payments position continues in the red. Nakagama projects Japan's net-asset position rising to $410 billion by 1990.

These projections, says Nakagama, ``show how little ground there is for optimism about the economic and financial outlook.''

For the moment, he expects an upturn in economic growth and an increase in consumer prices of about 1.2 percent this year.

As the yen rises, however, pushing up the price of key Japanese imports in the US, he expects the rate of inflation to start climbing by 7 percent or more by 1987, and perhaps to the double-digit zone further on.

Interest rates will have to climb to keep Japanese investors interested in US bonds, he says.

There are other signs of growing Japanese financial might. Japanese direct investment abroad is climbing. It is now third in the world after the US and Britain. Japan's overseas production is small in relation to its domestic production. But new money has been flowing out fast.

In fact, the Japanese Economic Planning Agency's Overall Planning Bureau figures Japanese direct overseas investments will reach $300 billion by the year 2000, rivaling those of the US and Britain.

For this surge in Japanese financial might, Nakagama blames the Reagan administration's budget deficits and ``crazy'' rearmament program. The money and resources devoted to arms are not available to help American industry remain competitive with Japan.

``They sold this country to Japan,'' he says. ``It is absolutely tragic.''