The Japanese yen has plunged too far in recent months against all other major currencies, Treasury Undersecretary Anthony Solomon said here yesterday.
He warned that if this situation continues, an excessively cheap Japanese exports to "a level once again disruptive to the world system and to the U.S. in particular."
Japan's international accounts had swung dramatically from heavy surpluses in the past two years toward deficit as a result of the appreciation of the yen against other currencies, especially the dollar.
But in recent months, as oil prices increased, and as an expanding domestic economy further increased Japanese imports in general, the yen started to slide in world markets. Against the dollar, the yen this year has dropped about 35 percent.
Solomon stressed that he was "not trying to talk to dollar down, but the yen up." He said what has happened in the foreign exchange markets "is an overreaction not fully justified by fundamental factors," and that if it goes further, disrupting the world trading system, "it would be in no one's interest for this to happen."
In a telephone conversation elaborating his remarks, delivered at a meeting of the U.S.-Japan Trade Council, Solomon said the market had "overshot" because the "swing from (Japan's) surplus to deficit was so huge in its magnitude and so abrupt in its timing." This, coupled with a massive oil price increase, had caused the problem for a country totally dependent on imports, Solomon said.
Coincidentally, the governor of Japan's central bank, Terichiro Morinaga, said in Tokyo yesterday that there was no intention of raising the official discount rate, despite the sharp decline of the yen. Officials here nonetheless would not be surprised by a boost in the rate.
In another development, the Central Bank Council of the German central bank in Frankfurt raised the discount rate from 5 to 6 percent, and the Lombard rate from 6 to 7 percent, effective today. The discount rate, like the U.S. discount rate, is that charged member banks borrowing from the central bank. The Lombard rate is the rate charged to commercial banks.
An increase of about one half point had been expected as a result of pressure from the conservative council, which represents regional banks, to bring the central bank rates more into line with market rates. Thus, the full point increase was something of a surprise in West Germany.
But Central Bank President Otmar Emminger said the impact of the increases in the two rates would be reduced because the council at the same time was expanding the volume of credit being made available.
If banks in Germany are in position to use the additional lines of credit, Solomon said, then the effect of the combined moves might be neutral. In any event, he didn't see much impact on U.S. policy because the focus since Oct. 6 has shifted from attention to interest rates to management of bank reserves.
In world currency activity, gold was up $5 to 382 an ounce in Zurich from Tuesday's close of 377. In London, it closed at $382.50, up from $379 Tuesday. In New York, gold weakened a bit to close at $381 an ounce.
In Frankurt, the dollar closed at 1.8040 marks, down from 1.8085 at Tuesday's close; in Zurich at 1.65925 swiss francs from 1.6750; in Paris at 4.22 French francs, down from 4.2375; in Amsterdam at 2.0030 guilders against 2.0077, and in Milan at 833.45 lire, down from 834.55.
In London, where the dollar has been recovering from its lows of recent months, the pound rose to $2.0760 from $2.0685. In Brussels, the dollar recovered from a poor opening to close unchanged at 29.855 belgian francs.
In Tokyo, the dollar continued to improve, closing yesterday at $237.80 yen, up from 237.70 Tuesday, but it fell to 236.62 in New York.