The substantial shifts in the exchange rates of the world's major currencies last year will reduce Japan's trade surplus with the United States by $20 billion, but may increase its surplus with Europe by $10 billion.
Those are the conclusions of economist C. Fred Bergsten, director of the Institute for International Economics. In a speech to the Japan Society in New York yesterday, Bergsten said that the 30 percent appreciation of the yen against the dollar since February 1985 should cut the U.S. trade deficit with Japan from the $50 billion level to around $30 billion beginning next year.
At the same time, he predicted, Japan's surplus will rise from $50 billion in 1985 to $60 billion or more.
The reasons are the drop in oil prices -- a $10 billion to 15 billion annual benefit for Japan -- and a slight depreciation of the yen against the West German mark and other European currencies at the same it has been appreciating against the dollar.
"Japan's surplus with Europe could rise by another $10 billion in 1986," he said, in part because of increased demand from expanding European economies.
He also cautioned that even with an improvement in its trade deficit with Japan, the U.S. global trade imbalance will show little change unless there is a substantial further depreciation of the dollar.
To achieve the full benefits of the dollar devaluation initiative launched Sept. 22 by the Group of Five, Bergsten said that the yen needs to appreciate quickly by another 10 percent from 180 yen to a dollar to about 160 to 1.
Moreover, he said, the yen should then strengthen even more dramatically, to a range of 120 to 130 to a dollar by 1990, to avoid the re-emergence of huge Japanese trade surpluses. He cited studies by Brookings economists Edward M. Bernstein amd Lawrence B. Krause that have similar conclusions.
Bernstein testified before a House subcommittee that to reflect the underlying competitive positions between Japan and the United States, the yen-dollar rate should now be about 120 to 1. Krause suggested that the yen should gradually gain against the dollar, arriving at a 100 to 1 basis toward the end of the decade.
Bergsten said that the U.S. global deficit will remain a burden because the dollar has not depreciated much, if at all, against the currencies of other major trading partners in Asia such as Korea and Taiwan. And against the currency of the biggest U.S. trading partner, Canada, the dollar actually is stronger than it was a year ago.
"The current account is even worse than the trade balance, because the massive deterioration in America's international financial position -- from world's largest creditor country to world's largest debtor country in just over three years -- is producing a large adverse shift from net interest earnings to net interest payments," Bergsten said.
He estimated that "under the most optimistic" scenario, the net foreign debt of the United States will reach $400 billion before levelling off.
Bergsten repeated his endorsement of a system of international target zones to minimize fluctuations in major currency relationships.