AN UNCONTROLLABLE YEN

By John Greenwald

THE SUPERSTRONG YEN SHOULD DRIVE up the price of parts that Japanese businessman Toshinori Minohara makes for office copiers and force him out of the market. But Minohara is turning the currency's power into an opportunity: instead of expanding in Japan, he recently opened a plant in the city of Dongguan, China, where cheap wages will lower his manufacturing costs. "Nowadays I show my buyers a part that costs 1,500 yen," says Minohara. "But very soon we will be making this in China, and it will cost 1,000 yen. That's how we keep our customers coming back."

While nimble executives like Minohara have coped with the strong yen and its relentless rise since January, Japanese business leaders were shaken last week when the currency soared to a record 80.15 to the U.S. dollar. (The dollar fetched 240 yen 10 years ago.) Tokyo responded by slashing the Japanese central bank's discount rate from 1.75% to a record low of 1%. The idea was to make any interest-bearing Japanese investment less attractive to foreign investors who might then choose to put their money in dollar-denominated bonds and thus strengthen demand for that currency. The government also unveiled an emergency plan to lower the yen by, among other things, spending more on public works, which would presumably stimulate the economy and thus perk up demand for imports. But American economists reacted as if they had seen it all before. "If Japan really wanted to knock down the yen, they'd give in on motor vehicles," said Allen Sinai, the chief economist for Lehman Bros.

In fact, the moves were intended as a ceremonial bow toward Washington, which last week threatened to slap billions of dollars' worth of tariffs on Japanese autos and auto parts unless Tokyo lifted its trade barriers against American cars and trucks. "This is a No. 1 priority," U.S. Trade Representative Mickey Kantor told Time. "We know what we want, and we are going to insist upon it."

But Japan has some good reasons not to fret too much over its $66 billion trade surplus with the U.S. and the strong yen that it produces. The currency makes foreign investments cheap and helps Japanese firms build factories around the world, especially in Asia. In America, Japanese automakers for the first time last year produced more cars and trucks than they exported from Japan. That turned around Japan's faltering share of the U.S. automotive market, from 23.1% in 1993 to 23.2% in 1994.

Some powerful companies have even managed to raise their prices during the yen's ascent without fear of losing business. These companies, with names like Kyocera and Minebea, control vast global markets for little-known but essential items such as ceramic packages for semiconductors and precision-engineered ball bearings for jet engines. In a controversial new book called Blindside, journalist Eamonn Fingleton argues that these firms help ensure that Japan will overtake the U.S. as the world's leading economy by the year 2000. "Their success to date has been greater than most Americans realize," he writes, "and constitutes one of Japan's greatest hidden strengths."

Indeed, nearly half the electronic products that the U.S. imports from Japan are available from almost no other country. Observes John Stern, vice president for Asian operations of the American Electronics Association: "Having abandoned key sectors of electronics manufacturing, the U.S. has little choice but to grumble and pay up."

In more competitive fields, the mighty yen has had the effect of making Japanese companies sharpen their edge by trimming payrolls and shifting work abroad. In the past two years, for example, Nissan has closed an assembly plant near Tokyo and eliminated 5,000 jobs, or 7.5% of its Japanese work force. "They just responded by becoming more efficient,'' says Geoffrey Barker, chief of research at the Smith New Court Securities firm in Tokyo.

But if the yen has a bracing effect on the economy, it also could force Japan to confront its cultural commitment to lifetime employment. All this downsizing, which has come on top of a severe three-year recession that ended last October, helped push Japan's traditionally low unemployment rate to 3% last year, the highest since 1987. "If the yen continues to appreciate," says Shigeki Tejima, a senior economist at the Export-Import Bank of Japan, "Japanese companies will be forced to stress international competitiveness more than maintaining jobs at home."

Consumers, in the meantime, have gained few benefits from the strong yen. While the currency makes vacations in Hawaii and other U.S. destinations cheaper, Japan's creaky retailing system has been slow to pass along lower prices for imports to shoppers. Says Tokyo homemaker Momoko Suzuki: "As long as you live in Japan, there are not many merits to the strong yen. One exception is beer. We now buy Budweiser for 120 yen a can instead of Japanese beer for 230 yen."

Like Suzuki, many Japanese thirst for attractively priced foreign goods. When the U.S. Commerce Department opened an office in Osaka to distribute mail-order catalogs from firms such as Neiman Marcus and Lands' End last year, more than 2,000 were snapped up the first weekend. But it will take thousands of scenes like that one to begin to deflate the yen.

--Reported by Edward W. Desmond/Tokyo, Barbara Rudolph/ New York and Adam Zagorin/Washington

With reporting by EDWARD W. DESMOND/TOKYO, BARBARA RUDOLPH/ NEW YORK AND ADAM ZAGORIN/WASHINGTON