Questions, Answers To the Complexity Of the Japanese Yen

AFTER weeks of volatility on the foreign exchange markets - with signs of more instability ahead - it seems a good time to provide some background. Here are some questions and answers about the complex relationship between the dollar and the yen.

Why are exchange rate tables so disorienting?

Because when the yen appears to rise - when it takes more of them to buy $1 - its value is falling. And when the yen seems to drop, its value is increasing. So up and down are no help at all.

One solution is to stick with strength and weakness. A strong dollar buys more yen. When the yen gains strength, it takes fewer to buy a dollar. And vice versa.

When and why do people get really excited about the dollar/yen rate?

If the dollar falls, uh, weakens, near the point where $1 buys just 100 yen, then economists and politicians get excited. This state is called ``parity'' - 1 cent equals 1 yen, $1 equals 100 yen - and many people view it with dread, seeing it as a floor below which the dollar should not go.

When the late President Nixon decoupled the United States dollar from its value in gold in 1971, freeing the world's major currencies to float in value relative to each other, $1 bought 360 yen. So in a little more than 20 years, the dollar has become almost four times weaker relative to the yen. That is why Tokyo's prices seem so high to foreigners (although they are high for Japanese paid in yen too).

But isn't the dollar worth just a hair over 100 yen right now?

Yes, and that is why we have been reading so much on this subject lately. Last August, the dollar weakened very close to parity, hitting 100.40 yen, and, earlier this month, it again broke, or fell below, 101 yen. In the past few days, thanks to what is known as ``central bank intervention,'' the dollar has gained some strength, and yesterday it closed at 104.10 yen in Tokyo.

`Central bank intervention?'

Sometimes discreetly and sometimes quite openly, government banks enter the currency market to try to influence its course. At the end of last week, when the dollar was veering toward 100 yen and losing strength against the German mark, more than a dozen central banks spent the equivalent of an estimated $5 billion to bolster the dollar.

Tokyo, New York, London - where is this famous currency market?

It is in all three of these places and other places as well. There is no central market for currency. Dealers communicate internationally to buy and sell big wads of one currency for big wads of another, transactions that are conducted electronically. So the ``market'' is everywhere and nowhere at the same time.

Tokyo is the world's largest market; almost $1 trillion is traded every day. Two main motives drive people who buy and sell currency: One is the need for another nation's currency to do business abroad or to convert foreign profits into one's own currency, and the other is the attempt to make a profit by buying a currency at one price and selling it later at a higher price.

Why is the yen so strong these days?

Many economists, when asked this question, cite the trade imbalance between Japan and the rest of the world. In the last Japanese fiscal year, which ended March 31, Japanese exporters sold about $130 billion more goods and services abroad than importers brought into this country.

Richard Koo, a senior economist at Nomura Research Institute in Tokyo, says the strong yen is structurally driven by the trade imbalance. ``If you close your markets, [and] continue to export, everything will hit the exchange rate. And it has, over the last 20 years,'' he says. This is because Japanese exporters who need to bring their earnings home - to pay workers or buy supplies in Japan - must purchase $130 billion worth of yen each year, creating a huge demand that makes the Japanese currency more scarce and more expensive. Furthermore, foreign investors have been active in the stock market here, and they have bought about $30 billion worth of yen this year in order to make their investments.

The current recession in Japan keeps Japanese investors from balancing the equation by selling vast sums of yen in order to get dollars or deutsche marks or pounds to invest overseas. So the Japanese exporters must buy their yen in the international market.

This strong yen, who does it hurt, and who does it help?

The huge trade imbalance notwithstanding, it hurts Japanese exporters, whose goods become more expensive overseas. Corporate executives here say they cannot make a profit on exports when the yen is stronger than 120 to the dollar.

Many analysts have suggested that US officials ``talked down'' the dollar to strong-arm Japan as part of a strategic maneuver connected to market-opening discussions between the two countries. But US officials have denied this and recently said the dollar should not be undervalued.

A powerful yen also is supposed to help foreign companies sell goods in Japan, because their goods become cheaper here. But Neil MacKinnon, chief economist at Citibank in London, says it also ``delays recovery, prolongs and deepens recession, and does little to increase the demand for US exports'' in Japan.

A strong yen makes it more expensive for foreign companies to operate here - the cost of doing business in Japan is already extremely high and a weak dollar only makes it worse.

Finally, in the US, the strong yen has a potentially detrimental effect, which is that rising prices for Japanese goods may spark inflation across the board. That is an important reason why the US organized intervention by foreign central banks to shore up the dollar.