U.S. APPEARS TO TOLERATE FURTHER DLR DECLINE
In a bid to hasten Japan's promise
to speed up its economic growth and open markets to foreign
trade, top U.S. officials appear once again to have signaled
their tolerance of a lower dollar.
    Treasury Secretary James Baker and one of his top aides,
Assistant Secretary David Mulford, said last week there was no
target for the dollar, a statement that sent the yen soaring
against the dollar, despite massive central bank intervention.
    "That was no slip of the tongue," said one western monetary
official, who asked not to be identified.
    For now, the strategy appears to be working. Japanese
officials said late last week a package to bolster domestic
demand will be ready in early April. Until last week, there
were few indications the package would be ready anytime soon.
    The Reagan administration, facing an uproar in Congress
over the apparent lack of progress in cutting the 169.8 billion
dlr trade deficit, is learning now that to extract results from
Japan, dramatic action is required.
    Last week the White House imposed unprecedented tariffs on
certain Japanese electronic goods after Tokyo failed to adhere
to a semi-conductor pricing accord between the two countries.
    The shift in U.S. strategy, in part designed to appease
mounting Congressional anger over Japanese policies, comes just
two weeks before industrial nations reconvene here to review
the Paris agreement to stabilize currencies.
    And news that Japan earned a record 18 billion dlr trade
surplus in the first two months this year just underscored the
need for urgent action, in the view of U.S. officials.
    Nonetheless, U.S. officials see signs of improvement in the
deficit. "I'd be stunned if we were not going to derive some
benefits (from the lower dollar) soon," said one.
    In Paris, leading industrial nations agreed to cooperate
closely to foster currency stability within ranges reflecting
"underlying economic fundamentals" or economic reality.
    The agreement envisages those fundamentals to include Japan
and West Germany stimulating their economies and the United
States cutting its budget deficit.
    The three nations, joined by France, Britain and Canada,
agree these policies are essential to redress huge global trade
imbalances.
    But analysts say markets have signalled the underlying
fundamentals imply a lower dollar, rather than a stable one.
    Markets, in effect, are less confident than governments
that these measures -- including U.S. budget deficit cuts
agreed by Congress and the White House --will be carried out.
    Nonetheless, the dollar's sharp fall has not undermined 
cooperation. A U.S. economic policymaker said the accord was on
track and Tokyo and Bonn seem "to want more stimulative measures
which is what the Paris accord calls for."
    International monetary sources said exchange market
developments generally have not unsettled policymakers,
although Japan is an obvious exception. "Everybody feels it can
still be managed," one source said of market developments.
    But last week, the Bank of Japan spent an estimated five
billion dlrs intervening to halt the rise in the yen, and other
central banks about one billion dlrs.
    Another monetary source said Japan was upset with America's
half-hearted attempt to halt the falling dollar, flouting the
Paris accord outright.
    The source, close to the top levels of Japanese economic
policymaking, said Japan's understanding of the accord was that
the yen would be kept at around 154 to the dollar, the level it
stood at when the accord was struck.
    The source said Tokyo was extremely worried by Washington's
use of the exchange rate to change Japanese policies. It was a
"pointed reminder" to Japan to do something about the trade
issues, the source said of the dollar's fall against the yen.
    By departing last Sunday from the language of the Paris
accord -- that nations agreed to foster currency stability
around current levels -- Baker triggered a run on the dollar.
    Later in the week, Mulford too said there was no target for
the dollar and called on Japan and West Germany to live up to
their international responsibilities and stimulate growth.
    But U.S. officials said recent market developments will not
unravel the spirit of the Paris agreement.
    "There's a realisation now that you cannot leave things
alone, everyone agrees that the external (trade) imbalances
ought to be adjusted," one official said.
    "While no-one is going to cede national sovereignty, we
certainly seem to be moving towards much closer co-operation,"
another U.S. official said.
    The officials said the meeting here, where the six will be
joined by Italy, will be a status report.
    "Japan will have to explain what the state of their program
is and Germany will report on its plans. Maybe there's a need
to move faster," one source said.
    Mulford told Congress last week the Paris accord called, in
effect, for currency stability for several months. This would
buy time for Japan and West Germany to speed up their economic
growth and help bring down the U.S. trade deficit.
    His comments appeared to serve notice on other major
nations that Washington cannot wait too long for action to
reduce the gap between the Japanese and German trade surpluses
and the U.S. trade deficit.
 Reuter
