Once again, Japan has confounded the Western world: it has learned to live with the high yen, just as it did with the oil "shocks" in 1973 and 1979. Moreover, Japanese investors have turned an appreciating currency to their advantage, snapping up American real estate and other properties at a bargain-basement rate.
Having found that a stronger yen did not trigger a disaster on the trade side, Japanese officials now appear relaxed about present exchange rates. When the dollar last week slipped through a 130-yen threshold to historic new lows, almost daily, we didn't find Finance Minister Kiichi Miyazawa on the next flight to beg help from Treasury Secretary James Baker.
Said Bank of Tokyo Chairman Yusuke Kashiwagi the other day: "We are not going to scream whenever the yen appreciates against the dollar." Many Japanese economists no longer flinch when they hear longer term forecasts of a rate of 100 yen to the dollar -- or even rates in the 90s.
This week, as the yen continued to appreciate, the dollar drifted down to an all-time low of around 126 yen. That brings to mind a conversation two years ago with Akio Morita, chairman of the Sony Corporation, when the dollar was weakening but was still worth about 180 yen.
I asked Morita what would happen to his business if the dollar fell by another one-third, to 120 yen. After feigning shock at the idea, Morita said: "I wouldn't like to see that, but if we could stop these fluctuations up and down, I guess we could live with 120 yen."
In fact, the global economy has not enjoyed the exchange-rate stability that Morita and most business people believe essential, because Baker and his counterparts in the "Group of Seven" countries haven't been able to coordinate their economic policies in the right way.
Nonetheless, Japan has adjusted to that reality of a strong currency. The Japanese economy is booming along, with prospects of a 4 percent growth rate in 1988, almost twice the performance now expected for the U.S. economy.
Japanese companies are not only not going broke, but Japanese exports have remained extraordinarily high. How come? Japanese manufacturers (much the same applies to German companies struggling with a high deutschemark) trimmed profits in order to maintain their share of the American market. Some Japanese production was moved to offshore locations (including the United States) to cut costs.
Although U.S. exports have benefited from a cheaper dollar, some American manufacturers frittered away part of the exchange-rate advantage by boosting prices and profits instead of going after larger market shares. That's one reason the trade deficit is still enormous.
Meanwhile, the high yen provides extraordinary buying power for Japanese investors. Morita recently acquired CBS's record division, valued at about $2 billion. At 180 yen to the dollar, Morita would have had to put up almost 50 percent more in yen, or the equivalent of another $1 billion.
This is not to suggest that the Japanese buying binge is going on at a dangerous pace. Overall, Japanese investment has provided American jobs and spurred American competitors into streamlining their own operations. There should be no more concern about Japanese (or German, or English, etc.) investment here than about American investment in other countries. That's part of the same desirable unrestricted investment pattern that goes hand in hand with free trade.
Politically, Japanese leaders will still insist for home consumption that the yen is too high and hold out the hope that one day the yen will be cheaper. But until the huge American trade and current-account balances turn around -- a process that is likely to take years -- the yen is likely to get stronger against the dollar.
As the late chairman of the Federal Reserve Board, Arthur F. Burns, used to say, a strong currency is the sign of a strong nation. The fact is that, right now, Japan is enjoying the best of all scenarios: steady economic growth, a substantial trade surplus despite a strong yen and the ability to make productive investments around the world.
That may not have been precisely what Secretary Baker had in mind back in September 1985 when he started the dollar on a downhill roll at the famous Group of Five session at New York's Plaza Hotel. Baker desperately wanted to reduce the trade deficit and bring down an overvalued dollar. He knew that without such a result, Congress was sure to pass protectionist legislation.
But two years later, with the dollar knocked off its perch, we still have a record trade deficit; we still face protectionist legislation; and with a weak dollar, we now face inflationary pressures from higher-priced imports.
It proves a point that both Burns and Paul Volcker liked to make: when a major nation starts the process of depressing its own currency, it's impossible to predict the outcome.