The continuing plunge of the US dollar can be explained in large part by the panic of Japanese investors, who have been withdrawing their money from international markets and fleeing home. Evidence abounds that Japanese investors have been dumping dollar-denominated assets, producing a more or less steady fall of the currency against the yen for almost a year. In March alone, Japanese investors were net sellers of foreign bonds by dollars 13.1bn ( pounds 8.5bn). Carl Weinberg, a New York consultant with High Frequency Economics, said: 'Japan's investors are withdrawing funds from foreign markets at a record pace to cover liquidity needs at home.'
Meanwhile, foreign investors have been putting huge sums into Japan, buying net dollars 11.7bn of Japanese stocks in March for a total portfolio capital flow that month of dollars 24.4bn. The word on Wall Street is that much of the capital inflow is coming from foreign subsidiaries of Japanese companies.
At the same time, Japan's huge current account surplus, dollars 130bn and growing, has continued to climb, in large part due to an expanding trade surplus. The Clinton Administration, backed by some foreign governments, has reacted by demanding broad market-opening measures and other policy changes. Political pressures have been intense, neither side has achieved the desired results and the US-Japan relationship has deteriorated to perhaps the lowest point since the Second World War.
Now it is time for a ceasefire. The election of Socialist Prime Minister Tomiichi Murayama with the support of the conservative LDP party is seen as bizarre, even by Japanese reformers who support the soul-searching that has led to loss of national consensus. The result can only be continued paralysis in policy-making and perhaps the loss of the fledgling reform movement. This is not the time for outside pressures or high-profile Japan bashing.
The dramatic changes underway in Japan reflect considerable insecurity. The post-war successes are no longer taken for granted. Business as usual will not do for a now mature economic superpower, which is beginning to question the very values that produced its success. A nation that has produced engineers and superior technocrats now seeks to reform its system to produce more 'creative' thinkers.
The reform movement may be sidetracked, but many of the ''reforms' now underway in Japan are irreversible. Growth rates of up to 12 per cent are unlikely to be repeated - somewhere between 3.5 per cent and 6 per cent is more likely. The big employment gains that powered growth in the 1970s are also not likely to be seen again.
Meanwhile, Japanese companies are undergoing dramatic restructurings, profits are down and lifetime employment will soon be a thing of the past.
All of this suggests a society in turmoil, worried about long-term structural decline. Thus the push for more creativity, for dramatic change.
Given Japan's economic firepower and continuing ability to contribute to world stability, it is important that this national soul-searching be allowed to continue without foreign intervention. It is particularly important that the US-Japan relationship evolves on a co-operative track. The alternative would be a new world war between two economic superpowers, slugging it out over trade and financial advantage.
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