LAST WEEK, the dollar traded strongly against Asian currencies, including the yen, closing Tuesday at its highest point in seven years against the Japanese currency. Meanwhile, the stock market was volatile as investors worried about weak earnings in the second quarter. What's spurring the market and currency gyrations and what do they mean for the average American household? Will cheap Asian goods swamp our shores and threaten jobs? Should average stock investors worry about their portfolios?
Professor of applied economics, the Johns Hopkins University
The surge in the dollar is due right now to a fiscal policy in Japan that's been very loose. They've got a mountain of debt -- by far the worst of any industrialized country. Japan's economy is imploding. It's going right down the tubes.
The Japanese are now throwing in the towel and saying we've got to save our own domestic economy. The markets are now picking up that Japan is going to increase its money supply to stop the terrible deflation in prices. The side effect of that is a weaker yen against the dollar. That means goods made in Japan will be cheaper. If you're an American and you're buying, that's good.
The American economy is running almost flat out at capacity and there's a labor shortage in some industries, so I don't see what's happening in Japan as having much of an effect on labor here. Where there will be an effect is on corporate earnings. The cheaper goods from Japan will squeeze out some profit margins for American companies, particularly those that compete with the Japanese. Earnings won't be as great, which will put a damper on things on Wall Street. Ultimately this could bring an end to the big bull market. It'll be a different ball game for investors. Instead of seeing the rapid rise in the value of their portfolio every morning, they'll be seeing some down turns.
Senior economist, NationsBank Corp.
Initially what appears to have occurred is the agricultural sector here is getting hit first. Almost 40 percent of our agricultural production is exported and 40 percent of that normally goes to Asia. The dollar's rise means the Asian markets can't afford these goods. As a result, agricultural prices here in the United States are down across the board. You hear about Alaskan fishing fleets being unable to sell their catch. They used to sell almost all of it to the Japanese and Asians. After several good years in agriculture, it looks like we're in for some bad.
This means consumers will see lower food prices. Also, energy prices are flat or lower. Growth in Asia was pushing demand for oil. Demand in Asia has not only dropped off, it's almost nonexistent. For summer travelers here that will be a good thing at the gas pump.
We're also seeing a bit of a price war in the automobile market. But I don't think we'll see the Japanese and Koreans slash car prices. They're looking for a better profit margin to make up for the losses in their domestic markets. I also don't think we'll see a huge flood of Asian goods swamping our shores. There is no trade financing to ship it. The Japanese can get the financing. That's where we'll see the trade gap widen. American companies will cut prices to compete. That means pressure on profit margins for U.S. companies, which investors are seeing reflected this week in the stock market.
There's a few inklings of layoff announcements, but they will be outweighed by the strength of the U.S. economy.
One other good thing about the Asian crisis is that it's kept the Fed from raising interest rates. It's about 1 percent below where it was this time last year. The perverse thing about the Asian crisis is that if you're Asian it's been terrible. But for Americans, so far, it's turned out to be a good deal.
Chief bank economist, First Union Bank Corp.
For the average household there are a lot of potential positives. If we were ever to have an Asian crisis, now is probably the best time. The reason is that the dollar's strength against the yen and some of the other Asian currencies means cheaper goods coming out of those markets, which in turn creates price pressure on competitors. That will keep the Fed from raising interest rates.
So the advantage to the average household is low inflation, low interest rates on things like home equity loans and credit cards, and cheaper priced goods. That's a real positive. I don't see the stronger dollar as a trigger for a huge surge in consumption. People will buy things they've been thinking about -- only a little earlier perhaps.
On the business side, it's a different story. The stronger dollar could have a depressing effect on American companies' ability to export goods to Japan and Asia. The export side of the equation is a real risk. A lot of firms are dependent on overseas sales. So we could see some slow down in earnings.
What companies need to do is look to other markets to ship their goods. Indeed that has been happening. Already U.S. businesses are moving their products to Mexico, Brazil and other parts of South America. That's picking up a lot of slack. By changing export markets, U.S. businesses can replace losses seen in Asia.
Chief economist, KeyCorp.
The dollar's surge against the yen and other Asian currencies is directly related to the very nasty recessions some of those economies are in. They are not at their bottom yet, and may not hit bottom for a year from now. To do battle with the recession, Japan will have to use all of the available weapons. One of the most important ones will be reversing the big tax increases which precipitated this mess in the first place, and increase the money supply. All of this means we'll see cheaper goods from Asia landing on our docks.
That's good for consumers because it creates price pressure on direct competitors. Not only is our standard of living lifted by a stronger dollar -- a dollar buys more goods -- but it's a restraining factor on inflation. That should keep the Fed from raising interest rates.
Another beneficiary of a stronger dollar will be the American companies which import the raw materials they need to make goods. They may not pass on all of the price savings to the consumer upstream, so clearly some companies' profit margins will be helped.
Companies that compete direct with Asia may see their earnings pinched. That challenge to corporate profitability is one of the reasons the stock market [last week] has seen a lot of volatility.
Pub Date: 5/31/98