NEW CURRENCY PROBLEM SEEN AMONG U.S, EUROPE, JAPAN

  The highly visible drama involving the
  yen's sharp rise against the U.S. Dollar is obscuring the fact
  that the Japanese currency has hardly budged against major
  European currencies, thus creating a new set of exchange rate
  distortions, Japanese and European research officials said.
      The officials, looking beneath the rhetoric of statements
  by the Group of Five (G-5) industrial nations, told Reuters the
  currency movements of the past two years are also creating a
  fundamentally new world trade picture, which is throwing up new
  trade tensions and imbalances.
      Trade figures show that the new currency alignments are
  already changing the Japan-U.S. Trade axis into a Japan-
  European Community (EC) axis, to the discomfort of Europe.
      In many ways, not least in terms of rare international
  cooperation, the September, 1985 New York Plaza pact between
  the U.S., Japan, West Germany, Britain and France to cut down
  the value of the dollar was a historic one.
      But it is the underlying peaks and troughs of the major
  currency movements which lay bare the real picture, in which
  the Plaza pact appears as an event of prime importance, but not
  necessarily central significance, the officials said.
      The officials said that when the Plaza agreement took
  place, the dollar was already on its way down. The agreement
  simply helped it on its way. Senior EC financial expert in
  Tokyo Tomas de Hora has watched the movements closely.
      "You have to look at the dollar's peak compared with now,
  and that was well before Plaza," he said.
      On February 25, 1985, the dollar peaked against the yen at
  263.15 yen. On September 20, the Friday before Plaza, it was
  242. Since then, despite massive Bank of Japan intervention and
  periodic market frights about further G-5 concerted action, the
  dollar trend has been down, down, down.
      Yet the ECU is now around 173.4 yen. The historical cross
  rates for sterling and the mark tell much the same story. The
  European currencies are moving back up against the yen.
      The close relationship between exchange rates and trade
  flows makes it difficult to see which is driving which, but
  undoubtedly the trade equation between the big three is
  changing. In 1986, Japanese imports and exports with the EC
  both grew by around 50 pct in dollar terms, five pct in yen.
  This gave Japan a 16 billion dlr trade surplus.
      Last January, Japanese exports to the EC totalled half of
  of sales to the U.S, against about a third in recent years.
      Trade with the U.S in 1986 rose 23 pct for exports and 12
  pct for imports in dollar terms, but fell 13 pct for exports
  and 21 pct for imports in yen terms.
      "The basic meaning for Europe is that Japanese firms have a
  tremendous interest in exporting to Europe, where every unit
  sold maximises profits in yen terms, which is what is important
  to them. Suddenly, instead of the U.S., It is Europe that is
  laying the golden egg," said de Hora.
      The EC is worried. EC business also had a remarkable year
  in Japanese sales, but this can be explained partly due to its
  start from a small base, compared with total Japan-U.S. Trade.
      The Japanese think EC firms are now more competitive than
  U.S. Firms, a factor which is aggravating the exchange rate
  imbalance, and which will cause problems.
      "This currency alignment between Japan and the EC is
  reflecting the excellent performance of the EC countries. But
  therefore, Japanese goods may keep their price competitive
  edge," said Azusa Hayashi, Director of the First International
  Economic Affairs Division of the Foreign Ministry. "If you want
  my objective view, I don't expect a drastic improvement in our
  trade imbalance. Last year, we asked for moderation in exports,
  and this year we may have to do so again," he said.
  

