Every so often in the American political system, you get to see the voice of the people make a difference--even to something as mysterious and far away as the changing relationship of the Japanese yen and the U.S. dollar.
Today the Japanese currency is valued in international trading at about 175 yen to $1, where for most of last year the yen traded at about 240 to $1. Today business and government leaders in Tokyo are worried about Japan's ability to sell its exports in the United States, where last year Japan was able to sell America $43 billion more in merchandise than it bought from it.
Tokyo's current concern is easy to understand. If, say, it costs 2 million yen to build a car in Japan and ship it to the United States, that car could be sold last year for about $8,300. But today the price would have to be more like $11,400.
At 240 yen to $1, that hypothetical car is the kind of bargain the strong dollar brought us in recent years. Low-priced imports gave us the good life without inflation, and we bought it--the trade gap with Japan was only the most prominent item in a $124-billion total U.S. trade deficit last year.
But we paid a price in other ways. Because of competition from imports, factories closed in the United States. And people began to doubt the economic theory that said the free market would adjust the currency and the export-import imbalance in good time. They threatened drastic action. Their congressmen last September were about to introduce more than 500 trade bills, almost all of which would have imposed tariffs or otherwise restricted imports to the U.S. The last time protectionist sentiment boiled over like that, in 1930, Congress passed the Smoot-Hawley tariffs--which history now lists as one of the causes of the Great Depression.
It was to head off such a tide of legislation that U.S. Treasury Secretary James A. Baker III got the finance ministers of Japan, West Germany, Britain and France together last Sept. 22 at New York City's Plaza Hotel. There the five major industrial nations agreed to cooperate to lower the value of the dollar, and beyond the currency question to coordinate their economic policies.
Since that meeting, the dollar's value has fallen against all the major currencies but especially--roughly 36%--against the yen. It's hard for a Japanese exporter to absorb such a shift. That's why Caterpillar Tractor, embroiled in recent years in a price war with Komatsu Corp. of Japan, is looking for better days ahead: Komatsu has had to raise prices twice in the last six months.
U.S. auto makers are smiling, too. The currency shift cuts their Japanese competitors' profits. Think of our hypothetical car in the other guy's currency. Where an $8,000 car meant 1.9 million yen at an exchange rate of 240 yen to $1, at 175 yen to $1 it means 1.4 million. The 500,000-yen difference used to pay for a lot of things--free options on the car, profits for the company, something extra in the bonus for all those happy employees we've read about. Now the Japanese car makers are going to have to make the kind of hard choices Detroit has been faced with for years: whether to get the price of the car down by cutting options, or trimming materials, or cutting wages.
But let's not forget, the yen is strengthening even though Japan faces a threat to its exports. Why is that? Because as another, and perhaps more significant result of the Sept. 22 agreement, Japan is lowering interest rates in order to spur its economy. Only about 16% of that economy's gross national product stems from exports. If the island nation spurs its home market--which has lagged in recent years--that could give a big boost to its industry, and to world trade.
West Germany, too, is lowering interest rates to quicken its economy. Thus world economic growth--pulled in recent years almost solely by the United States--will be getting help from others as well.
That, says economist Pierre Rinfret, was the real purpose of the five nations' currency agreement. Rinfret, whose consulting firm advises corporations on currency movements, thinks that the dollar will settle about where it is now but that in the future we will see more cooperation among the major nations on money values. The Sept. 22 meeting, he says, set the world on a path "toward a managed foreign exchange system" and was an example of the United States providing economic leadership to the world.
If so, it's reassuring to reflect that the leadership was spurred not by economic theory but by the voice of the people.