To many Americans, the explanation for last week's fall in the dollar's value was that the U.S. government let it decline to make imports more expensive and exports more competitive.
But that's only partly true. Yes, the Federal Reserve allowed the dollar to fall. But it was given tacit permission to do so by the government of Japan. Tokyo told U.S. negotiators in September that it would use its capital to moderate the dollar's fall but not prevent it.
Japan called the tune, and probably not for the last time. For if there is one thing the present crisis has produced, it is the public emergence of Japan as the world's dominant financial power.
The Japanese are saying it's time. Minister of Economic Planning Tetsuo Kondo said last week that Japan stood ready to help the world if the U.S. economy faltered in the wake of the stock market crash. "This is the responsibility of the Japanese economy, the strongest and most dynamic economy in the world today," Kondo said.
Big talk, but he can back it up. With trade surpluses of more than $60 billion a year and $100 billion more in surplus savings, Japan is the richest country on earth.
It is also becoming the land of the rising living standard as houses and roads are built at a furious clip. The economy now is growing 4.8% a year, says economist Jonathan Francis of First Boston Corp.
And the Tokyo stock market has fallen less than New York--despite U.S. financial analysts' predictions that the Japanese stocks would collapse first.
The analysts didn't reckon with the powerful Ministry of Finance, which persuaded the insurance companies, banks and brokers that hold 40% of Japanese company stock not to sell. There was decline but no panic in Tokyo.
And the latest currency shift won't clobber Japanese exports either. Japanese companies, say industrial experts, are geared to compete at 100 yen to the dollar, compared with 138 today.
But the real story is in investments, not exports. The major Japanese companies, which to date have only 5% of their production outside the country, will now expand throughout the world, using their strong currency to build plants and buy properties.
Shortage Is Here
The weak dollar will create bargains and Japan will add to the $23 billion it already has invested in U.S. factories and office buildings (total investments, including stocks and bonds, approach $100 billion).
Foreign investment will replace trade as a topic of controversy. But fears of foreigners buying America are beside the point, says economist Deborah Olivier of Claremont Economics Institute. "We will need to court Japan's money in the next five years to finance economic growth," Olivier says. "We have the shortage here."
Note: Debtor is not deadbeat. U.S. investments and assets around the world remain massive at over $1 trillion. But the United States lately has been taking in $300 billion more in loans and investments than it is sending out, while Japan, with $200 billion in external investments, has been doing a lot of the lending and investing.
What produced the turnabout? Competitive government that put Japan's interests first, and incompetent government that didn't do the same for U.S. interests.
The overvalued dollar of the years 1982 to 1985, which brought Japan an export boom and wracked U.S. industry, was crucial. In 1982, Japan's foreign investments stood at a modest $25 billion; by 1986 they had ballooned to $200 billion.
Japan didn't rise by free trade or world-beating industry--although its companies are admirable and competent--but by targeting industries abroad, while its government kept the yen undervalued and foreigners out of the home market. Yet the U.S. government never forced Japan to open its markets and waited years to reduce the dollar's value. Even Detroit reacted faster than Washington.
OK, past is past, and the future has possibilities. Japan's new global role should open up its markets. And the yen may join the dollar as a key currency for world trade.
But change can be unsettling, too. "The U.S.-Japan economic relationship," says one banker, "is like a dance, in which one partner must lead. Japan now is taking the lead." And America now follows.