By Barbara Demick, Inquirer Staff Writer

Posted: April 01, 1990

Finance ministers in Tokyo and Washington are in a dither about exchange rates, but Peter Mastro is a happy man.

Mastro owns a Subaru dealership. And as far as he can tell, the precipitous slide of the Japanese yen — the very subject prompting concern elsewhere — can only mean good things for his business.

Subaru, to cite just one example of a Japanese import, did not prosper during the years that the yen gained strength against the dollar. Consequently, the price of the most popular model of Subaru rose from about $12,000 in 1985 — the year the yen started heading toward the stratosphere — to about $14,000 now, Mastro said.

When your average Subaru customer came in, he got sticker shock. The last few years have been a disaster for us, said Mastro, whose dealership is in Tampa, Fla.

But the yen has made an abrupt turn, its course reversed by concerns about a Japanese economy that may be overinflated and a Tokyo stock market that is definitely nervous. After a slow, steady slide last year, the yen began tumbling in mid-February. On Wednesday, the dollar soared to 159 yen, the highest exchange rate in 40 months. The exchange rate ended the week in New York at 158.35 yen to the dollar.

All together, the yen has lost more than 20 percent of its value against the dollar in the last 16 months.

So shouldn’t the stronger dollar be resulting in cheaper prices for American consumers?

The decline of the yen doesn’t help the trade balance, but from the consumer’s standpoint it doesn’t hurt, said Delos Smith, an economist with the Conference Board, a New York business research group.

The yen’s weakness against the dollar could allow Americans to pay lower prices for automobiles and consumer electronics — the two largest categories of Japanese imports. That would, in turn, put pressure on U.S. manufacturers to lower prices on competing products.

Already, some dealers in consumer electronics say they are seeing modest price decreases on selected lines of videocassette recorders, compact-disc players and camcorders.

You are seeing prices for camcorders. as low as $700. You wouldn’t have seen that a year ago, said Les Gordon, chief financial officer for Silo, a Philadelphia-based chain of appliance and electronics stores. Some of it is because of the dollar-to-yen relationship, and some is because of improving technology.

What makes pricing in consumer electronics unpredictable is the extent to which the industry has managed to defy the laws of Economics 101 in the past. As a rule, imports are supposed to become more expensive when the dollar falls in value relative to other currencies.

But from 1984 to 1987, a period in which the dollar lost half its value against the yen, prices of Japanese-made VCRs actually fell by about 15 percent.

The price cuts were made possible not only by rapid advances in technology, but also by a willingness on the part of Japanese manufacturers to take smaller profit margins to protect their market share.

Some analysts believe that the Japanese companies might seize the occasion of the weaker yen to bolster profits.

It is going to be interesting to see whether these Japanese manufacturers use this (the lower yen) to lower prices in some critical areas and perhaps spur demand. or to bolster their razor-thin margins, said Robert Gerson, editor of Twice, a trade journal for the consumer-electronics industry.

Gerson believes that some smaller manufacturers will lower prices to boost sales and increase market share.

Anne Melissa Dowling, senior vice president of international investing for Timco, a money-management company, disagrees:

When the yen got to 120 (to the dollar), people were squawking because they love their Japanese cars and stereos. The Japanese kept their market share by not passing the increases on. Now, they will reap the benefit.

Unlike the prices of consumer electronics, stickers on Japanese-made automobiles had risen in recent years — although not as much as the yen increased against the dollar.

Michael Luckey, an economist specializing in the auto industry, said Japanese car prices are up about 30 percent since 1986, a period in which U.S. auto prices rose by 15 percent.

If prices stay steady now, that’s a victory for the consumer, said Luckey. Whether you are going to see outright price reductions, I would tend to doubt. but if the yen stays (at current levels), you may see the (Japanese) companies using the money to offer incentives on slower-moving vehicles.

In any event, consumers may need to be patient before they reap the benefit of a stronger dollar. The Japanese automakers, along with other companies that manufacture for export, use various currency-hedging strategies to protect themselves against rapid changes in exchange rates.

Daniel J. Dalton, director of investor relations for Subaru of America, the Cherry Hill company that imports Subarus, said that price reductions could not take place until October at the earliest, when 1991 models are shipped to the showrooms.

Even then, there are no promises.

The current situation, where the dollar has been strengthening, has occurred over a relatively short period. The extent to which it stays remains to be taken into consideration, Dalton said.

Whatever happens with prices of Japanese imports, there is a flip side for the U.S. public. As the dollar gains strength against the yen, American-made products become more expensive and less competitive abroad relative to those produced in Japan.

Moreover, the fall of the yen could ultimately push U.S. interest rates up

because of the interlocking nature of international currency markets.

In an effort to support the yen, the Bank of Japan — the counterpart to our Federal Reserve Bank — has raised interest rates several times, most recently by a full percentage point on March 20 to 5.25 percent. The higher rates were thought necessary by Japan’s central bank to attract international investors to Japanese investments denominated in yen.

But the United States has to keep its interest rates high enough so that investors from Japan and elsewhere keep buying U.S. Treasury bonds, which finance the government’s deficit. So higher interest rates in Japan could force rates higher here.

On balance, the American consumer is probably better off with a stronger yen, said Sandra Shaber, a consumer economist with The Futures Group, a Washington consulting firm.

As the dollar strengthens internationally, that serves as a major lid against inflation, yes, but. I think the real concern is over interest rates, she said.

The Japanese and U.S. governments have sold billions of dollars to buy yen in recent weeks to try to slow the yen’s decline. And the weakening yen is expected to be a main discussion topic when finance ministers from the seven largest industrial nations meet Saturday in Paris.

Should the governments be able to stabilize the yen — and the consensus among currency analysts is that the exchange rate will not be allowed to stray beyond 160 yen to the dollar — that could dictate against any big reductions in prices of Japanese imports.

Another factor that would hamper price reductions is the simple fact that many Japanese products are no longer made in Japan.

People don’t realize that the Japanese companies are becoming increasingly marketing and distribution companies, not manufacturing companies, said economist Shaber.

This is particularly true of Japanese carmakers who, fearful of rising production costs in Japan and of the strong yen, have opened plants in the United States or in Pacific Rim countries whose currencies are pegged to the

dollar.

Mastro, the Subaru dealer, is still hopeful that the sagging yen can boost his sales. But many of the cars he sells, particularly Subaru’s new Legacy, are assembled in Indiana.

If the yen continues (to weaken), maybe we can be more competitive, Mastro said. But it is very difficult when, here in the U.S. the labor cost is going up. It makes it impossible to give a price reduction without going broke.

Joseph Purcell, president of Cherry Hill Toyota, says that 90 percent of his Toyota Camrys — his best-selling model — come from Kentucky. The overwhelming majority of the Toyota Corollas come from Fremont, Calif. or

from Ontario, he said.

We’ve seen it (price) go up all these years. We don’t know when it will come down, Purcell said. And then, I imagine they will add equipment to the cars to make them more attractive rather than reduce the prices.

In all my time in the business, 17 years, I have never seen a decrease in price, Purcell said. I have seen them throw in (free) power electric

windows, but never a price reduction.