Japan's Subtle Subsidy
Byline: J.T. Young, SPECIAL TO THE WASHINGTON TIMES
The administration's report last week on international exchange rate policies again raised the issue of currency manipulation. This subtle subsidy allows nations to influence export and import prices as effectively as payments or tariffs, but without obvious intrusion into each transaction.
U.S. concerns over currency manipulation have focused on China. But Japan has been a culprit longer, is a greater threat to U.S. manufacturing interests, and its currency has depreciated 8 percent against the dollar in just the last two months. In the practice of the subtle subsidy, no country has been more subtle or effective than Japan.
China directly pegs its currency to the dollar. Japan has been no less effective, but far less visible, through long-term intervention in foreign currency markets to keep the yen undervalued. America should be even more concerned about underpriced Japanese exports to the U.S. (and overpriced American exports to Japan). Japan exports higher-value products - a market where the U.S. is still competitive - and, unlike China, shows no inclination to stop its manipulation.
The Bush administration, U.S. Congress, the General Agreement on Tariffs and Trade, the World Trade Organization and the International Monetary Fund rightfully condemn currency manipulation. But such manipulation need not take the form of directly pegging one currency to another at an official rate - as China did with the yuan to the dollar - to be effective. Government intervention by buying and selling currencies is no less effective in artificially influencing currency values. As a 2003 Institute for International Economics study of Japanese, German and American interventions in the 1990s found, "Intervention can effectively influence exchange rates."
Japan's intervention strategy is a product of their export-driven economic model and their economic problems that began in the early 1990s. Since 1991, Japan saw its average real economic growth slow precipitously to a barely positive 0.9 percent (versus 2.7 percent for the U.S.). While, Japan's economy slowed drastically, so too did the growth of its money supply. This dramatic deflation put upward pressure on the yen's value. But allowing that appreciation would have endangered Japan's exports, its economic engine - particularly with the U.S. purchasing 25 percent of its exports.
With a slumping economy, an appreciation-pressured currency, and an already high ratio of public debt to gross domestic product (164 percent versus the 39 percent for the U.S.), Japan had limited options. It was imperative that export growth not be reduced while domestic demand was choked off by deflation. Therefore, from 1991 to 2004, Japan intervened in the foreign exchange markets an incredible 356 times to the tune of $632 billion. …