With Toyota overtaking General Motors as the world’s biggest car maker, Democratic politicians on Capitol Hill are complaining about the weak Japanese Yen, which makes it easier for Japanese companies to sell their products overseas.
Both U.S. Treasury Secretary Hank Paulson, and Takatoshi Ito, a member of the Japanese cabinet’s council on fiscal and economic policy are claiming that “market fundamentals” are responsible for the current situation, and that government manipulation of the currency was not involved.
The Group of Seven (G7) meeting of finance ministers, is set to meet today, and Democrats are insisting that Secretary Paulson distance himself from his counterpart in Tokyo at the meeting. Paulson, meanwhile, is strengthening resistance in the Treasury to Congressional pressure over currency policy.
Japan was forced by U.S. pressure to revaluate its currency in 1985, and current Japanese exports, at 16 per cent of gross domestic product, have exceeded the levels of that year. In 1998, under President Clinton, the U.S. intervened in financial markets to prop up the value of the Yen, a move seen as an attempt to encourage the Japanese in their struggle to emerge from a recession. President Clinton also suggested that the move was an effort to avoid an Asian financial crisis.
According to AFP in France, the holding steady of interest rates at the European Central Bank, and preparations for a rise next month have lifted the Euro versus the Dollar as well as the Yen, with the Yen trading at near record lows versus the Euro, and a report concerning Japanese machine orders expected to show that orders have contracted over the previous period, placing pressure on Japanese officials to avoid raising interest rates.
With Democrat pressure on the Bush administration to find a way to address the imbalance, Japan’s global position seems to be at issue, and as in 1998 with the Clinton administration intervention, fundamental changes may need to be made. The Japanese economy is traditionally one of the strongest in the world with an extensive technology sector, but the undervalued Yen is becoming comparable to the Chinese Yuan, which has been advantageous to Chinese exports. Issues in the Japanese economy including concerns over consumer finance and a sluggish economy have led to government caution. The Japanese currency situation is seen by some as threatening the global financial situation. Meanwhile, Japanese firms’ 2006 pretax profit climbed 6.5% to another record, according to Nikkei. According to the Minister of Foreign Affairs, improvement in corporate profits should drive an improvement in the overall economy. An increasing import/export imbalance was noted as part of the overall slowdown of the economy, and perhaps the situation will improve as the domestic economy gains strength.
Given the Washington-Tokyo emphasis on market fundamentals as the major factor in the weak Yen-Dollar (and Yen-Euro) exchange, if the Japanese Ministry of Foreign Affairs’analysis is correct, a self-correction is currently in progress and analysts are looking forward to a resulting rise in interest rates initiated by the Bank of Japan to provide the upward motion in the Yen that U.S. Democrats, among others, are looking for.
“Democrats press Bush as yen weakness hits industry”, February 9, 2007, Financial Times (print edition)