TOM FENNELL May 1 1995


TOM FENNELL May 1 1995



The Sony Store in east-end Winnipeg is a consumer mecca, where highend televisions, stereos and video recorders beckon shoppers. But lately people determined to buy products made by the famous Japanese firm have been gasping at more than just the electronic wizardry—sticker shock has also taken their breath away. The reason: since the beginning of the year the Canadian and U.S. dollars have lost almost 20 per cent of their value against the Japanese yen, and last week both hit postwar lows against the currency. As a result, says Doug McCartney, the Sony Store’s general manager, a single camcorder that was selling for $3,900 last year has jumped to $4,800. And with the growing value of the yen, many hard-pressed consumers are moving to lower-priced goods. “It’s pushing the price up,” says McCartney. “And sometimes it’s hard to justify to the customers.” The greenback’s fall against the yen has been deep and prolonged—and it has dragged the Canadian dollar down with it. In the past decade, the currencies have lost more than two-thirds of their value against the yen—from 192 to the Canadian dollar to less than 60 last week—and more than half their value against a second benchmark currency, the German mark. In recent weeks, the greenback, which hit a record low of 79.75 yen before recovering to 83.08 at week’s end, has even defied a concerted international attempt to stop its descent amid fears of a full-blown currency crisis.

During that period, the central banks of Germany, Japan and the United States bought tens of billions worth of U.S. dollars in a bid to boost the greenback’s value. On March 30, Germany’s central bank even cut interest rates by half a percentage point in an attempt to make the mark less attractive to foreign investors. The Japanese followed Germany’s move in mid-April, and cut interest rates by 0.75 of a percentage point. But the dollar’s decline continued as Japanese and German politicians moved to distance themselves from the debacle, saying the United States now has to create international confidence in its currency by slashing its deficit, which is projected to fall to less than $200 billion in 1995. Said Japanese Home Affairs Minister Hiromu Nonaka last week: “The United States should take responsibility for the fall of the dollar against the yen.”

U.S. commerce department officials responded that Japanese trading practices, and not U.S. monetary policy, were driving down the dollar. The U.S. trade deficit with Japan stood at a record $90 billion in 1994, and U.S. purchases of made-in-Japan autos and auto parts accounted for more than two-thirds of that deficit. Japanese goods in America are paid for in greenbacks, but when those receipts are converted to yen, it drives up the value of the Japanese currency. Some analysts say the United States may even quietly favor a weak dollar as a way to pressure Japan into opening up its markets. But two days of high-level trade talks in Washington last week that were aimed at lowering barriers to the sale of U.S. cars in Japan ended without progress. Said U.S. Commerce Secretary Ron Brown: “It is unacceptable for any administration to do nothing in the face of a $90-billion trade deficit.”

The surging yen, however, may yet help to reverse the huge trade deficit and stem the fall of the Canadian and U.S. dollars as foreign consumers stop buying increasingly expensive Japanese-made goods. There are signs that may already be happening. For one, Mazda Motor Corp. announced last week in Japan that it will cut the production of cars destined for the North American market, because it simply cannot sell them at the current exchange rate. In the past, Japan’s multinationals were able to deal with the rising yen by cutting costs or shifting production offshore. But with the yen poised to soar even higher, analysts say there are no longer any easy solutions. Higher prices are not an option; in fact, Toyota Motor Corp. was only able to raise the price of its cars in North America by 0.3 per cent this year. Even that slim increase is being felt in showrooms across Canada. Says Arthur Keller, co-owner of Downtown Toyota in Toronto: “We will suffer until Toyota can produce enough cars in North America [where they are cheaper to manufacture] to offset the low dollar.”

The Japanese automaker is already taking steps in that direction. Toyota Canada announced last week that it was spending $600 million to expand its plant at Cambridge, Ont., where it plans to produce a new sport utility vehicle starting in 1997. The move is expected to create 1,200 new jobs.

Still, with the dramatic decline in purchasing power of the Canadian dollar against the yen, Canadian consumers did get a very small break last week—but only if they travelled to the United States or bought products made in that country. Reversing a historic trend that saw the two currencies move in tandem, the loonie climbed while the

greenback fell. At the close of trading last Friday, the Canadian dollar stood at 72.96 cents (U.S.), 2.87 above its low for the year. Analysts say the Canadian and U.S. currencies are “decoupling” because both countries are following very different monetary policies. For one, Federal Reserve Board chairman Alan Greenspan does not appear ready to raise interest rates to defend the U.S. dollar or to further contain inflation.

In contrast, Patti Croft, senior economist with Wood Gundy Inc. in Toronto, said Bank of Canada Governor Gordon Thiessen is determined to be vigilant against inflation by keeping Canadian rates high. Although the Bank of Canada did make a modest 0.12 percentage-point cut in the bank rate to 8.18 per cent last week, Croft says she does not expect any major reductions in the central bank rate. And that could mean mortgage rates will settle in the eight-per-cent range by the end of the year. The Canadian dollar is also expected to rise to about 74.5 cents (U.S.) by mid-1996—a level that would maintain the advantage the cheap Canadian dollar now

The value of the Canadian dollar against the greenback has also been boosted by confusion in the ranks of Quebec separatists.

According to Klaus Said, managing director and head of global foreign exchange for J. P. Morgan & Co. in New York City, the Canadian dollar has strengthened as the case for Quebec separatism has weak-

gives exporters. “There is no indication from the Bank of Canada that it is willing to sanction lower rates,” adds Croft. “They are not showing any sign of giving in.” ened. In fact, the dollar jumped by half a cent to close at 72.49 (U.S.) on April 10 alone, following reports that Premier Jacques Parizeau and Bloc Québécois Leader Lucien Bouchard had openly disagreed over how the Quebec referendum will be fought. “The much-touted demise of the Parti Québécois really helped,” added Said. “It took some of the political uncertainty away.”

But in the United States, it is the budget deficit, not the trade deficit or high yen value, that many analysts blame for the greenback’s problems. And there are fears the deficit would rise if the Republican-controlled Con-

The United States could make the greenback more attractive by raising interest rates. But most analysts believe that it would take a massive interest rate hike to push the greenback higher—and that could backfire by sending the U.S. economy into recession. “The United States is an extremely insular country in the matter of its interest rates,” said James Grant, editor of the influential New York-based Grant’s Interest Rate Observer. “What matters first, last and always is the state of the domestic economy.”

Republican-controlled gress succeeds in implementing a promised $250billion tax cut. As well, as the German and Japanese banking systems become more sophisticated, investor confidence in the yen and mark has grown. Now, as investors diversify

Now, as investors diversify into the two currencies, they are pushing up their value. “The U.S. market was once the single big alternative for investors,” says Said. “But the German and Japanese markets are both very well developed now, so why leave everything in U.S. dollars?”

And a strong U.S. economy could yet put a floor under the dollar. Lloyd Atkinson, an economist and partner in MT Associates Investment Counsel Inc. of Toronto, says the U.S. economy is basically sound and is likely entering an extended period of growth. At the same time, he adds that the U.S. budget

deficit has declined three years in a row and, as a percentage of gross domestic product, will fall to less than two per cent this year—the lowest of the G-7 countries. “I am quite stunned at the degree to which global investors have decided to chuck U.S. dollars,” says Atkinson. “I think we will have a very sharp reversal.” But for now, shoppers at Winnipeg’s Sony Store and elsewhere will likely have to pay more while they wait for the yen to come back down to earth.


A weak dollar hits consumers and ignites trade tension with Japan