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SCMP Reporter

THE Japanese yen has been on an upward trend since 1971 on the adoption of the floating exchange rate system.

  On the prevailing fixed-rate systems of the time, the equivalent yen-United States dollar exchange rate was 360.

  Moody's Investors Service says on this calculation the yen's value has appreciated about four times against the dollar in 24 years.

  The yen's strength is attributed primarily to the trade surplus that Japan has been enjoying since the mid-1980s.

  This is especially so in the case of its largest trading partner, the US.

  The trade surplus has been growing steadily, to US$120 billion in 1993, up from $107 billion in 1992 and $78 billion in 1991.

  Last year, the trade surplus was about $121 billion.

  Moody's suggests it is generally believed the yen is over valued.

  On a purchasing power parity basis, the yen might be considered to be 30 to 40 per cent overvalued.

  The strength of the yen has deep implications for the strength and vitality of the domestic economy along with the creditworthiness of Japan Inc in the future, says the credit-rating service.

  Even at 90 yen to the dollar, Moody's suggested the strength of the Japanese currency has hurt the domestic economy and manufacturing companies in general.

  'Export orientated Japanese industries and companies have begun to suffer as a result of the yen's sharp appreciation,' said Moody's.

  Domestic manufacturers only have two ways of coping with the rising yen, both have been used to good effect at previous threshold breakthroughs in the yen to the dollar.

  People said, for instance, Japan could not remain globally competitive beyond 220 and 120 yen to the dollar.

  Raising selling prices has been used but only on a temporary basis as it is difficult to sustain. The other is to reduce the costs of production.

  Moody's points out that some companies in the current surge in the yen have managed to pass on the increased cost of production in yen terms to customers, but many companies see their profits being seriously hurt by the appreciation in the yen.

  Companies are trying to maintain competitiveness by increasing the content of cheaper, in yen terms, raw materials from overseas suppliers instead of using domestic suppliers.

  For instance, Japanese car makers have been buying steel sheets from overseas suppliers instead of domestic ones.

  When extended into other industries, the rise of the yen will have some pretty profound implications for the Japanese economy.

  Whole sectors of the economy are under threat owing to the rising yen.

  This rapid rise in import penetration threatens to completely wreck the pricing structure in Japan, as cheaper manufactured and agricultural goods creep into the economy, undermining the earnings of wholesalers.

  Manufacturers will be more keen than ever to move production offshore, benefitting north and south Asian economies.

  A significant proportion of Japanese small to medium-sized business is in the supply of parts to major assemblers. To date, they have not shifted offshore, says Moody's, but such an initiative must now be a real possibility, faced with increasing competition from imported goods.

  Given these trends, when taken together, Moody's indicated there was a danger of a hollowing-out of the Japanese economy.

  Reverse importation will grow as groups import overseas produced Japanese goods.

  'An increase in overseas production causes existing domestic facilities to become idle, and this trend is expected to weaken Japan's manufacturing base and economy,' says Moody's.

  Worse still, the shift to a greater degree, of offshore production, will have a significant impact on Japan Inc's ability to influence its destiny as the production capacity traverses national, political, cultural and business environment borders.

  As Japanese firms go abroad they will expose themselves to new credit risks.

  The credit rating service says the shift overseas must be taken with care.

  Knee-jerk flights of production just to gain exposure to cheap labour will definitely not make Moody's comfortable about the concerned business' long-term credit worthiness.

  'There is no guarantee that overseas production will remain less expensive and attractive for Japanese manufacturers in the future,' said Moody's.



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