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NEWS ANALYSIS : Dollar Loses in the Translation : Currency: In theory, the stronger yen should help ease the U.S. trade deficit. But with Japan, theory doesn't always apply.

April 05, 1993|LESLIE HELM | TIMES STAFF WRITER

TOKYO — As the yen soars to record highs against the dollar, many economists and government officials are cheering it on, hoping a weakened U.S. currency will finally shrink America's intransigent trade deficit with Japan.

In theory, any increase in the yen's value should reduce the $48-billion deficit, which results from the fact that Japan sells far more in the United States than the U.S. sells here. The stronger the yen, the costlier Japanese products. That should weaken demand for Japanese exports in the United States as lower prices for U.S. goods should stimulate Japanese buying of American exports.

But when it comes to U.S. trade with Japan, economic theory doesn't always apply, say economists, government officials and business executives here.

True, the yen's rise to 113.75 per dollar as of Friday has made it tougher for Japanese companies to make money selling their products in America. "The high yen will bruise some and prick others," said Kenneth Courtis, an analyst at Deutche Bank Capital Markets (Asia). "But, while Japanese companies don't like it, they are preparing to be competitive even at 95 (or) 100 yen to the dollar by the mid-1990s."

The simple explanation for Japan's soaring surplus is that the weak Japanese economy is depressing American imports--despite lower prices--while a recovering American economy is boosting Japanese imports.

However, there are more significant long-term factors that mitigate the impact of currency swings, including the nature of goods traded between the two countries, differences in management styles and entrenched Japanese structural impediments to imports.

Most American products sold in Japan are high-technology goods for which there is little competition and limited demand. Falling prices have little impact on sales, so many American companies keep their prices high and pocket the extra profits.

Lowering prices could boost sales of consumer products, however, and of some industrial products such as paper, glass and petrochemicals. But in these areas, complex distribution systems and relations between producers and distributors prevent lower import prices from being passed down to consumers.

American paper producers already have a strong competitive advantage in Japan because of their low raw-material and energy costs. Yet, inexplicably, they have only a 4% share of Japan's rolled printing paper market, compared to 30% of Europe's.

On the other hand, high prices seldom have a substantial impact on Japanese exports.

"Japan tends to export machinery and components that buyers need even if the price rises," said Yoshinobu Nisaka, director of the Ministry of International Trade and Industry's import division. She noted, for example, that Palo Alto-based Hewlett-Packard Co. must buy the critical cartridge and engine for its popular laser printer from Japan's Canon Inc.

Differences in management practices between Japanese and U.S. companies also tend to cancel any positive impact the lower dollar might have on the trade imbalance. Japanese companies would rather see lower profits than lose customers.

Japanese parts makers who supply Apple Computer Co.--one of the great American success stories in Japan--will most likely swallow losses on component sales rather than raise prices sharply to reflect the higher yen and risk losing a valued customer. If history is a guide, they will boost profits again by redesigning parts and improving their manufacturing process to reduce costs.

Apple, with $568 million in sales in Japan, could probably boost sales further by lowering the prices of its computers to their U.S. levels, but it has no such plan. Like other American companies based in Japan whose profit margins are on average three times that of their Japanese counterparts, profits get priority over market share.

Successful sales of American products in Japan don't necessarily help cut the trade deficit. That's because many American firms sell products in Japan made somewhere other than in the United States. Apple's Macintosh computers, for example, are manufactured in Singapore. The Powerbook laptop is made in Ireland. What's more, Apple contributes to America's trade deficit by buying about $1.7 billion a year worth of displays, hard disk drives, semiconductors and other parts from Japan, a substantial portion of which go into Macintoshes sold in America.

In 1990, when a dollar was worth 144 yen, says John Stern, head of the American Electronics Assn.'s Japanese office, Japan's electronics trade surplus was $18.2 billion. Last year, with the dollar worth 126 yen, down 12%, that surplus actually rose 22%, to $22.3 billion.

That isn't to say a strong yen has no impact. In 1986, when the yen nearly doubled in value, Japan's economy was booming and Japan increased purchases of American imports 80% in five years. But many of the imports were high-priced items such as art works, gold, diamonds, supercomputers, aircraft, luxury cars and helicopters.

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