Business Comment: There is a vicious circle at work in Japan

What makes no sense at all is to run a huge trade surplus and then not invest overseas. This, however, is precisely what the Japanese are now doing.

Markets had written off the Japanese package to stem the rise and rise of the superyen in advance as a worthless exercise: the reality did nothing to change the verdict. Back from the Easter break, the currency markets continued to put the dollar under pressure, with 80 yen to the dollar becoming the new unthinkable threshold to succeed the formerly unthinkable threshold of 85 yen.

The most striking element of the package was the long overdue decision by the Bank of Japan to bring down the official discount rate from 1.75 to 1.00 per cent. Yet lower interest rates will do nothing to deter short- term investments in yen when the currency is appreciating at such a rate.

The root problem, agree most Japan watchers these days, is the persistent trade surplus. On the same day as the package was unveiled, the Japanese Finance Ministry announced that the surplus for 1994/95 was $118bn - about half with the US alone - down only fractionally on the $122bn run up in the preceding year. On this front, too, the package did little to address the problem. Deregulation is supposed to make the economy import more, so the decision to compress the time-scale of the deregulation measures from five to three years might seem helpful. But since the original reforms were seen as quite inadequate, this, too, was largely dismissed as window- dressing.

Yet the focus on the trade surplus may be misplaced. Japan has one of the fastest ageing populations in the OECD. It makes sense for it to make investments in the rest of the world which it can run down in future. What makes no sense at all is to run a huge trade surplus and then not invest overseas.

This, however, is precisely what the Japanese are now doing. They have gone on investment strike - and it's easy to see why from their perspective. According to Merrill Lynch, their cumulative exchange-rate losses on overseas investments now come to $400bn. That's a sting with a difference - especially since the calculations were made on the basis of 100 yen to the dollar.

When you've chalked up losses on that scale, you can see why Japanese portfolio investors are staying at home. Better to park your money in cash or bonds. Foreign direct investment continues at an annual rate of about $35bn but this is not enough to make much difference, given the size of the surplus.

There's a vicious circle at work here. The yen is expected to appreciate, so the money stays at home to avoid exchange-rate losses. But it doesn't go into the stock market because of the impact of the superyen on the profits of exporting companies. The fall in the Nikkei then adds to deflationary pressures.

Given the continuing and long-attested political difficulties of pushing through structural reform within Japan, the appreciation of the yen seems set to continue until it overshoots to a point that brings Japanese investors out of their shells again. What's changed, however, is the rate that would constitute an overshoot - with currency strategists like Neil Mackinnon of Citibank reporting a fundamental change of sentiment towards the yen. The rise and rise of the superyen may surprise us yet.