Japan buckles under threat of sanctions

JAPAN'S Prime Minister, Morihiro Hosokawa, panicked by the rapid rise of the yen against the dollar and the accompanying plunge in Tokyo stock prices, yesterday ordered his cabinet members to devise emergency plans to cut the country's trade surplus with the US.

Mr Hosokawa's action, taken under the shadow of possible US trade sanctions, represented a significant shift away from his defiant tone last weekend after he rejected trade demands from Bill Clinton at a summit in Washington.

After that summit, the Japanese media hailed 'The Japan that said No (to the US).' Political pundits in Tokyo talked about how the summit between Mr Clinton and Mr Hosokawa had established a new mature relationship between the two Pacific powers, and no longer one of Japanese subservience to the US. But yesterday the familiar old scenario of Japan bowing to gaiatsu, or foreign pressure, was back to dominate the headlines.

'Yen hits 101 . . . Hosokawa seeks urgent discussions for breakthrough to stalled Japan- US talks' was the banner headline in the evening tabloid Gendai. Beside it was a picture of President Clinton smiling quietly as Mr Hosokawa answered a reporter's question at a press conference last Friday. Even though the US government has taken no public position on the yen-dollar rate, the implication that the rising yen was Mr Clinton's revenge on Mr Hosokawa was lost on no one. On Monday, Mr Clinton merely said the US was 'considering' what steps to take against Japan.

Japan, which had a dollars 140bn ( pounds 95.9bn) trade surplus last year, nearly dollars 60bn of which was with the US, resisted demands from Washington that it accept a numerical system for measuring how well it is progressing in opening its import markets. Japanese bureaucrats fear measurement criteria would become fixed import quotas. But US negotiators say that without any numerical basis for measuring the opening of markets, the Japanese side will continue to resist any real change, as it has after so many trade agreements in the past.

On Tokyo's foreign-exchange markets the yen broke through the 102 yen to the dollar level; dealers said it would soon test the post-war high of 100.40 last August. Meanwhile, stock prices continued to slide, on fears that a high yen will damage earnings of exporting companies. The Nikkei 225 stock average closed down 485 points, at 18,974.

Mr Hosokawa told reporters he had 'serious concern' about the yen's rise against the dollar, although he claimed it had nothing to do with the failure of the trade talks last Friday. 'I believe it is not a question like that,' he said.

But foreign-exchange dealers, economists and corporate Japan had a different view. Private companies, already stuck in the country's worst recession since the Second World War, fear the high yen will destroy any chances of an early economic recovery. 'If the yen continues strong and Tokyo stocks continue weak, I am afraid there will be a threat of the economy making its third dip,' said one executive with an exporting company - even before any specific trade sanctions have been mentioned.

There were also fears that the appreciation of the yen would cancel out the benefits of the pounds 92bn economic stimulus package announced by the government last week.

The Bank of Japan tried to stop the appreciation of the yen: it reportedly bought about dollars 3bn during the day's trading. But dealers said the most the central bank could achieve yesterday was to stop the yen slipping even further.