Yen at work. (excerpts from new book

YEN AT WORK AT 9:30 A.M. ON MONDAY, OCTOBER 19, 1987 THE BELL ON THE FLOOR of the New York Stock Exchange signaled the start of the most tumultuous day in the history of U.S. financial markets. A wave of sell orders that had built up over the weekend cascaded into the stock market, pushing its computerized trading system beyond the limits and driving the Dow-Jones Industrial Average down at an unstoppable pace.

In Chicago the chaos was repeated at the futures exchanges, where harried traders couldn't keep track of orders, let alone keep up with them. In New York the Federal Reserve Board was forced to demand that the nation's biggest banks provide billions of dollars in credit to keep the brokerage houses open. In Washington the nation's financial regulators conducted frantic telephone conferences in a fruitless attempt to stanch the hemorrhage.

As news of the crash spread, investors across the nation telephoned Merrill Lynch, Prudential-Bache, and other brokerage houses to dump their shares at any price before they were wiped out. The sell orders came in such volume that phone lines jammed, and thousands of people were unable even to get through.

By the end of what quickly became known as Black Monday, John Phelan, the chairman of the New York Stock Exchange, said that the nation's markets had nearly suffered "a meltdown." Indeed, the exchange had dropped 508 points, losing 22 percent of its total value and wiping out $1 trillion worth of wealth.

Black Monday was one of those rare days in history when the shift in power from one empire to another can be marked, precisely and indelibly. The stock market crash dramatically demonstrated that the United States had lost control of its own economy, that decisions made in foreign countries could affect the standard of living and well-being of millions of Americans.

The commissions and panels that were created in the wake of the crash found plenty of villains among the professional speculators and giant institutional investors who'd pumped up the market like a giant balloon and then abandoned it in a matter of hours. None of the reports, however, placed the blame where it really belonged: on the Japanese investors whose actions had triggered the collapse. The nation's financial markets and the U.S. government's financing of the federal debt had become too dependent on the Japanese to risk the fallout from blaming them for the crisis.

The United States has become addicted to foreign investments. They finance the federal deficit, inflate real estate prices, grease the political system, and create new jobs. Like many addictions, however, this one has dangerous, perhaps even fatal, side effects.

No one knows how much money foreigners have invested in the United States. The government's attempts to monitor foreign investment are slipshod at best, and federal laws allow foreign investors to walk through the wide gaps in reporting requirements and to hide behind shell companies. No one, however, disputes that foreign investment in the United States has increased dramatically in the 1980s, and the situation has forced Washington to weigh the international economic repercussions of its most basic national decisions.

No foreign nation has invested at the pace of Japan, which benefits from its huge trade advantages and the basic thriftiness of its people. And no nation has carried out its foreign investments with the strategic mandate that motivates the Japanese, who, as a result, have gained enormous leverage over certain sectors of the American economy.

Through their purchases of Treasury bonds, Japanese investors virtually determine the interest rates set by the U.S. Treasury. Japanese investments in foreign securities (almost entirely those of the United States) began to soar in 1983, doubling every year to reach a peak of $102 billion in 1986. When the dollar began to decline, the Japanese cut back and as a result invested only $88 billion in 1987. Yet even the Bank of Tokyo recognized in a mid 1988 report that the level of U.S. investment by Japanese had become "a key factor in American money and capital markets."

The United States' dependence affects many economic factors, including the interest rates paid on home mortgages by millions of Americans. Not only are mortgage rates determined by the interest rates paid on federal bonds, but many of the popular adjustable-rate home mortgages are tied directly to the interest rates on the bonds. So if the Japanese decide they need another half percentage point in interest to buy U.S. bonds, millions of Americans wind up paying more for their homes.

Such is life in a nation that depends on foreign capital.

In early 1988 an unnamed official of the Reagan administration admitted to the Washington Post that the rising tide of Japanese investment in the United States threatened a shift of power from Washington to Tokyo. "Then we will become merely the day-to-day managers," he said. "We don't want the situation to degenerate into 'their minds and our muscle.'"

But that's clearly the direction in which America is headed. The Japanese are taking the lead in high-technology and other capital-intensive industries, shifting low-end work to U.S. factories to escape protectionism, and creating a mechanism to protect their growing investments in the United States.

Indeed, as Japan's investments and other interests in the United States has increased, so has its determination to protect them by trying to shape U.S. policy through paid lobbyists, campaign contributions by American subsidiaries, public relations and advertising campaigns, and even charitable contributions. In 1988 Japanese companies and government agencies hired 113 lobbying firms to represent them in Washington; the next-best-represented countries were Canada, with 61 lobbying firms, and England, with 44. Japan's government, foundations, and corporations spent at least $310 million on a wide range of activities, from lobbying to sponsoring public television programs aimed at influencing U.S. opinion, according to an estimate by Business Week magazine.

Congressional testimony and Washington experts estimate that Japanese interests spent $100 million in 1988 to influence U.S. policy. The figure is more than the combined budgets of the five most influential American business organizations in Washington: the U.S. Chamber of Commerce, the National Association of Manufacturers, the Business Roundtable, the Committee for Economic Development, and the American Business Conference.

"They are interested in creating an environment in which they can make money," Bernard Karsh, the director of the Center for East Asian Studies at the University of Illinois, told Business Week. "I see this as a major effort to come and stay, to legitimize their presence."

No nation has more leverage in the United States than Japan. And no nation is better shaped by its own history and politics to exercise control over the United States.

Since its rise from the devastation of World War II, Japan has demonstrated a grim determination to make any sacrifice needed to obtain economic supremacy at home and abroad. The tiny, resource-poor nation of islands is about the size of Montana and jammed with a population half the size of the United States'. Only 20 percent of its land is habitable, and once farmland is subtracted, the amount available for development drops to 5 percent.

Because Japan lacks the rich soil of the American breadbasket and the oil deposits of the Arab nations, it must trade manufactured goods for the raw materials it lacks. Thus in order to …