The Secretary of the Treasury also is to provide reports on exchange rate policy that contain the results of exchange rate negotiations conducted pursuant to this law. At various periods from through , Treasury found that China, Taiwan, and South Korea were each considered to have manipulated their currencies. In both reports, Treasury did not find currency manipulation by any country, including by Japan. Bank of Japan data indicate that the yen was at its weakest level in real trade-weighted terms in more than 20 years, even though Japanese authorities had not intervened in the foreign exchange market since March In April , the Government Accountability Office examined Treasury's assessments of whether countries were manipulating their currencies and concluded that "although China and Japan have engaged in economic activities that have led to concerns about currency manipulation," Treasury "did not find that Japan met the Trade Act's definition for currency manipulation in and Japan also has worked with the United States to bring about greater exchange rate flexibility in China and in other large economies in East Asia.
A decision by the Fund as amended , a principle for guidance of member's exchange rate policies states, "A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain unfair competitive advantage over other members.
As a comparison, one can compare the movement of the exchange rate between the German mark and the dollar with that for the yen and the dollar.
From to , the yen has appreciated more than the mark, and they generally have moved together. The correlation coefficient between the two indexes is 0. From , the Euro replaced the country currencies of the members of the European Union, and the index of its value replaces that of the German mark. In Figure 5 , the Euro index is set at in January As can be seen, the index of the Euro also has moved roughly with the yen with the exception of the U.
Most of the time, however, the values of these currencies seemed to be responding to the same outside influences. Figure 5. Even though Japan indicates that it has not intervened into currency markets since March , this issue still is a U. Japan also may use other methods to alter the expectations of currency traders and "talk down" the yen through various statements or other "jawboning. Policies aimed at China also could affect Japan.
Currently, Tokyo seems content to abstain from active intervention into international currency markets. At some point, however, Japan may want to decrease its dollar denominated foreign exchange holdings. It would likely do this by selling dollar-denominated assets, an action that would weaken the dollar and strengthen the yen.
Depending on how this potential divestiture is conducted, it could be viewed as intervention into foreign exchange markets albeit in the opposite direction of concern. Given the weakness of the dollar in , moreover, if the value of the yen "overshoots" and rises to a value considered to be too high for Japanese financial authorities, they may be compelled by political pressures from their exporting industries to intervene.
According to observers, the threshold exchange rate at which Japan may intervene seems to be around 85 to 90 yen per dollar. Ironically, intervention under current circumstances to strengthen the weakened dollar, may coincide with U. A question remains, moreover, whether the United States should take measures to compensate for past intervention by Japan. Setting aside the issue of how much past intervention actually moved the exchange rate and whether any exchange rate change affected actual market transactions, if U.
If, for example, the U. Most economists argue that currency markets are so large that only extensive and coordinated intervention has any lasting effects. Countries that do intervene often find themselves "leaning against the wind" and not materially altering either the direction of or the extent of change.
Also, intervention is expensive. Treasury securities and other liquid dollar assets. Allowing market forces to determine exchange rates while permitting central banks to intervene only to counter abnormal market shifts is the policy pursued for most major currencies of the world. In terms of foreign exchange intervention, Japan differs from China in two important respects.
First, Japan does not peg its exchange rate to any basket of currency. It generally intervenes to slow down rates of change not to maintain a certain exchange rate. It also does not require citizens to sell foreign exchange to the central bank at an official rate of exchange. Second, Japan allows for free flows of capital into and out of the country.
This makes currency manipulation much more difficult in Japan, since speculators and investors can offset official buying and selling of foreign financial assets. A currency peg without capital controls is expensive and difficult to maintain during a financial crisis. During the Asian financial crisis, for example, Hong Kong maintained its pegged exchange rate partly by raising domestic interest rates to attract foreign capital and to retard capital flight by local investors to reduce the incentive to convert Hong Kong dollars to U.
On October 23, , the overnight rate of interest in Hong Kong jumped from 6. Even though Hong Kong was able to maintain its exchange rate peg, the high interest rates caused a near collapse of real estate markets there. This is one reason China still maintains some capital controls. Under a policy of allowing market forces to determine exchange rates, some intervention still may be necessary to calm excessive volatility in markets or to counter trends that overshoot because of herd mentality and other effects.
In the past, the more successful of such interventions were coordinated among the large, industrialized nations. A major provision of various currency bills in Congress has been to clarify the definition of currency manipulation. While this legislation apparently has been aimed primarily at China's currency policy, in cases, the bills also have cited Japan and South Korea in the findings. Currently, the Department of the Treasury, in consultation with the International Monetary Fund, determines each year whether countries are manipulating their exchange rate for purposes of gaining an unfair trade advantage or preventing effective balance of payments adjustments and also have a material global current account surplus and a significant bilateral trade surplus with the United States.
Such undervaluation shall be found when the observed exchange rate for a foreign currency yen is below the exchange rate that could reasonably be expected for that foreign currency absent the intervention. In determining whether exchange-rate misalignment is occurring and a benefit thereby is conferred, the administering authority in each case would consider an exporting country's:. The bills also specify that trade data are to be those of the United States and other trading partners of the exporting country, unless such trade data are not available or are demonstrably inaccurate, in which case the exporting country's trade data may be relied upon if shown to be sufficiently accurate and trustworthy.
The issue of which data to use applies primarily to China, mainly because of imports and exports that flow through, but do not originate in, Hong Kong and the general lack of confidence in China's system for compiling statistics and reporting them. The data problem, however, also arises with Japan.
Each bill placed more emphasis on large-scale intervention by a country into currency markets—particularly when evidenced by large accumulations of foreign exchange.
Such accumulations of dollars, do not constitute prima facie evidence of currency manipulation, but they would be used along with other criteria to determine whether a country has been engaged in it. The bills have not addressed the issue of sterilization in currency intervention. A policy question is whether large-scale interventions are justified when part of macroeconomic policy even though they may have adverse affects on exchange markets.
Current trade law requires the President to seek to confer and negotiate with other countries to achieve:. The United States and Japan also conduct regular cabinet and sub-cabinet meetings that provide a venue to discuss exchange rates. In addition, the two countries meet in G-7 summits and at the APEC Asia Pacific economic cooperation meetings where currency and exchange rate policy is discussed.
Current bills related to Japan's currency in the th Congress would require Treasury to submit a semi-annual report to Congress on currency intervention by Japan to include any effort by Japan to create an exchange-rate misalignment including intervention and statements by Japanese government officials. The bills also would require Treasury to submit to Congress a proposal for a comprehensive joint U. It also would require the U. It also would give Treasury the authority to file a case in the WTO.
The currency bills in the th Congress also would require the Secretary of the Treasury to oppose any change in the governance arrangements in International Financial Institutions such as the International Monetary Fund or World Bank in the form of increased voting shares or representation if the beneficiary country has a currency that is manipulated or in fundamental misalignment.
The United States also would not approve any new financing by the U. Overseas Private Investment Corporation including insurance, reinsurance, or guarantee and oppose any loan to the country from a multilateral bank.
In the case of a persistent failure to adopt appropriate policies to correct the misalignment, the U. Trade Representative would request dispute settlement consultations at the WTO. There is no precedent for a case in which currency manipulation is considered to have the effect of an export subsidy and allows for direct retaliation against the exports of the offending country.
Legislation in the th Congress related to Japan's 55 currency include the following:. Fair Currency Act of Would provide that exchange-rate misalignment by any foreign nation is a countervailable export subsidy and clarify the definition of manipulation with respect to currency. Japan Currency Manipulation Act.
Would address the exchange-rate misalignment of the Japanese yen with respect to the United States dollar. Would require the Treasury Department to identify currencies that are fundamentally misaligned and would require action to correct the misalignment.
Such action would include factoring currency undervaluation in U. Would require the Treasury Department to identify countries that manipulate their currencies regardless of their intent and to submit an action plan for ending the manipulation, and would give Treasury the authority to file a case in the WTO. The slide below is from Toyota's FY annual results presentation. It details the split between a how many cars the company produces in Japan and overseas, and b how much revenue it generates in Japan and overseas.
First, the data show that the vast majority of the company's revenues now come from outside of Japan. But we also note that the majority of cars it builds are manufactured overseas.
While the company may still be a net exporter , and while the evolution may have happened over an extended period, the graduation to a focus on overseas production is clear. Source: Toyota, Not all manufacturers in Japan are large exporters, and not all exporters in Japan have been as aggressive as Toyota and the auto industry in moving production overseas.
However, it has been a trend for most of the last three decades. The chart below combines data from two government agencies to illustrate this point. It looks at the revenues from overseas subsidiaries of Japanese manufacturers and divides it by total revenues of those same companies for the years to In other words, more and more Japanese manufacturers were seeing the merit of expanding their businesses overseas and making products where they sold them.
The problem with this model, however, was that it hollowed out the Japanese economy. As factories moved abroad, fewer jobs were available domestically in Japan, which placed downward pressure on wages and damaged the domestic economy. Even non-manufacturers felt the impact as consumers reined in spending. The exchange rate factors heavily into discussions on energy security because the country is devoid of natural resources such as oil.
Anything that the country cannot produce through renewable sources such as hydro, solar, and nuclear energy must be imported. Even after the triple disaster of the massive earthquake, tsunami and nuclear meltdown that occurred in March , the country's government and manufacturers were keen to have the nuclear reactors back in operation.
While the government's quantitative easing program has been successful at weakening the yen since , the flip side is that imports cost more as a result of that weakening. The strengthening of the yen against the dollar after the Plaza Accord and the exchange rate volatility that followed has encouraged a rebalancing of Japan's manufacturing industry from one focused on domestic production and export to one where production has shifted overseas on a large scale.
This has had consequences for domestic employment and consumption, and even non-manufacturers and solely domestic companies are exposed. While the companies themselves have become more stable because they are less exposed to the negative effects of exchange rate movements, the future stability of the domestic economy is less certain. International Monetary Fund. Accessed May 8, Council on Foreign Relations. Congressional Research Service. Federal Reserve. If it is stronger than expected, yields could rise and power the dollar higher.
If weaker, the Fed's low interest rate outlook could continue and the dollar's downtrend could resume. The Japanese government slashed its economic outlook for the first time in three months, citing new weakness in private consumption and business conditions because of coronavirus emergency measures.
The yen is likely to underperform as Japan's economic outlook worsens, according to Win Thin, global head of currency strategy at Brown Brothers Harriman. Employees of a Tokyo foreign exchange trading company. Japan's economic plan 'backfiring' as yen surges. Read more.
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