View from City Road: Hopeful signs amid Japanese gloom

For months, evidence of the economic costs of the high-flying yen has trickled in. Yesterday that trickle swelled to a flood. Profits at Matsushita Electric Industrial Co, Honda Motor Co and TDK Corporation dropped or plunged. Sony's credit rating was placed under review by Moody's and a clutch of indicators suggested that the Japanese economy might be heading for a double-dip recession.

The yen has now traded at or close to historic records for weeks, reaching a peak of Y100.40 to the dollar last week. The US then joined forces with Japan to cap the rising yen, apparently in exchange for a new Japanese stimulative package and lower interest rates late next month.

A declining Japanese economy is bad for everyone. The key problem is that a rising yen does not boost imports from the rest of the world. Instead, imports must climb invisible but none the less effective barriers.

Deregulation that would help the consumer to buy cheaper imports is promised for this autumn. But it will take months or even longer to have an impact on the trade surplus.

Yet for all the gloom, there are some hopeful signs. As happened in the wake of the endaka recession of 1986, which followed the 1985 Plaza agreement to appreciate the Japanese currency, the high yen should mean that industry will restructure, sending more production overseas and reviving capital spending at home.

The government will also be forced to stimulate and deregulate the economy. Japan is down but certainly not out.