Bucking the Yen Trend

IT'S almost enough to make one think about returning to the gold standard. Japan and Germany are struggling with recessions. The United States is in the middle of a respectable economic expansion with little inflation in sight. Yet despite Uncle Sam's strong showing, the US dollar is declining in value against the deutsche mark and, particularly, the yen.

What's wrong with this picture? Enough to have prompted the Federal Reserve Board recently to use billions in marks and yen to prop up the dollar. The message to traders: Keep your eyes on the fundamental strengths of the US economy, particularly compared with the weakness of the German and Japanese economies.

Instead, currency traders seem to be keeping their eye on the trade dispute between the United States and Japan. Japan enjoys a record $122 billion trade surplus, nearly half of which is with the US.

From the US perspective, there are several ways to reduce the surplus. One is to increase the US savings rate relative to Japan's. Another is to encourage Japan to reduce its savings rate by adopting economic policies that boost spending and raise demand for imports. Yet another is to try to reduce formal and informal barriers in Japan to US imports.

The first approach, increasing the US savings rate, is a political nonstarter; the reduced federal and private spending could choke off the recovery. And lower savings rates and import barriers in Japan are captive to the country's fractured politics.

That leaves ``jawboning'' - suggesting that the US wants a strong yen, which could reduce demand for Japanese goods and hence reduce the trade gap.

Many currency traders see the Clinton administration making a big deal of Japan's trade statistics and see little progress likely on savings rates or trade barriers. If the US is serious, they reason, that leaves currencies. So they put money in the yen in hopes of riding its rise.

Although its long-term effect remains to be seen, the Fed's move to weaken the yen was needed. The currency was in danger of getting so strong that it would further darken Japan's already gloomy economy and act to offset any stimulus package on the horizon. The prospect of more expensive imports from Japan, as well as from Germany, would have given US manufacturers cover to raise prices, clouding the US inflation picture. And the action may have forestalled the need to raise US interest rates in order to attract overseas investment.