What does it mean that the yen is "misaligned"?
Currency misalignment takes place when a country's currency value vis-á-vis other currencies is not consistent with economic fundamentals. Most often, this reflects a policy choice carried out by governments and central banks to artificially set the value of a currency in order to gain an unfair competitive advantage over trading partners. When a country's currency is weak relative to others, its exports become cheaper to purchase in overseas markets, and imports become more expensive.
What is the effect of a misaligned yen on the U.S. auto industry?
The impact of the Japanese government actively maintaining an artificially low yen is a fundamental competitive factor for the entire U.S. auto and auto parts industry. The misaligned yen is giving the average imported Japanese car a $4000 windfall cost advantage over U.S. automakers and other competitors in the U.S. market. This ‘yen subsidy' also crosses over to Japanese vehicles made in the U.S. because of the high level of imported and subsidized auto parts used in their U.S. based plants.
How much of a windfall advantage does the weak yen policy provide for an average Japanese vehicle?
The average windfall cost advantage is $4,000 when the yen is valued at 118¥ to the dollar. The actual windfall varies depending on the model and product range (and the value of the yen). For higher end Japanese imported SUVs like the Toyota Highlander — and for the Lexus line, which is imported from Japan — it can range up to $10,000 per car.
How much of a windfall advantage does the weak yen policy provide Japanese auto manufacturers each year?
An artificially weak yen of 118¥ to the dollar provided a total of $8.8 billion in additional revenue to Japanese automakers on the 2.2 million cars they exported to the U.S. from Japan in 2006. The total yen subsidy provided to Japanese automakers in 2006 was $13.6 billion — $8.8 billion for car & truck exports to the U.S. and $4.6 billion for imported parts used in American-made Japanese cars.
What in your view is the yen's proper value?
Prior to intervention, the yen was valued at close to parity with the dollar, meaning approximately 95-100 yen to the dollar. We agree with the assessment of most economists today that, despite some mild strengthening in early March, the yen is still at least 20 to 25 percent undervalued.
Why would the Government of Japan choose to subsidize their products through a weak yen?
The Japanese government's weak-yen strategy was deliberately pursued as a policy of last resort to boost its economy via 'export-led growth' following ten years of failure to address domestic economic stagnation. Unable to stimulate normal domestic-led demand, the government reverted to its l970's 'Japan Inc.' model of export-led demand, an approach also known as 'beggar thy neighbor' — i.e., growth at your neighbor's expense.
The weak yen makes Japanese goods less expensive to buy in overseas markets like the U.S. The policy has been very successful for Japan; since the government began intervening in currency markets in 2001, exports, led by Japan's auto industry, have bolstered the economy, which is now growing at an annual rate of 4%.
Why is the yen subsidy a competitive challenge to U.S. automakers?
Between 2000 and 2004, the Japanese government spent more than $400 billion in direct interventions in global currency markets, buying dollars specifically to push down the value of the yen. This was the largest single currency intervention ever undertaken by a single country. Nevertheless, the U.S. administration tacitly approved Japan's aggressive moves to secure a weak yen, disregarding the impact on the U.S. economy and in particular the regions and industries most vulnerable to the resulting surge of Japanese exports.
Since 2004, the Japanese government has engaged in "jawboning" — actively talking down the value of the yen through public statements that make it clear to currency traders that they're willing to intervene again if necessary.
In addition, low Japanese interest rates have fostered an enormous "carry trade" by which international investors borrow yen at cheap rates to invest in instruments denominated in higher yielding currencies. The carry trade — estimated by some analysts to be worth up to a trillion dollars — keeps the yen low while creating a source of great potential instability for the global financial system. A stronger yen would undermine the financial underpinnings of the "carry trade."
Why is the yen subsidy a competitive challenge to U.S. automakers?
U.S. auto companies are changing their business models and making the painful but necessary adjustments to compete successfully in today's global market. Ford, DaimlerChrysler and GM produce state-of-the-art autos using the most advanced technologies in the world. However, these companies alone cannot counter the effects of an artificially weak yen that gives their Japanese competitors an unfair and unearned competitive advantage worth thousands of dollars per car.
Aside from hurting U.S. automakers, how does the yen subsidy impact the American economy?
The artificially low yen has helped fuel our trade deficit with Japan. The U.S. trade deficit with Japan has been our largest or second largest bilateral trade deficit for over 25 years. In 2006, the U.S. trade deficit with Japan reached $88 billion, the second largest such deficit we maintain with any trading partner. A full two thirds of this deficit ($54 billion) comes from autos and auto parts.
Why didn't the U.S. government act long ago to halt the Japanese yen subsidy policy if it is so damaging to U.S. interests?
Previous Democratic and Republican Administrations took actions to address the misaligned yen, but unfortunately, the current Administration has for some years now given greater priority to stimulating Japan's economic recovery than to the recovery of its own manufacturing sector. As explained by former Treasury Undersecretary John Taylor in his new book, "Global Financial Warriors", the U.S. deliberately broke long-standing precedent by encouraging the Japanese to weaken the yen in 2000/2001 to spur exports to strengthen its economy. Taylor writes:
"In the past, U.S. administrations had leaned heavily against the Japanese intervening in the markets to drive down the yen. By adopting a more tolerant position toward intervention … we could help to increase the money supply in Japan. … True to their word, intervention did increase; eventually it increased to unprecedented magnitudes, to $320 billion!"
What do you want the Japanese to do about this problem?
The Japanese government should work to reduce the $875 billion in foreign exchange reserves (80% percent in U.S. dollars) it built up in earlier years to stop the yen appreciating. There is no justification for these reserves. Also, Japan should accede to requests by European finance ministers to put the issue of currency misalignment on the table at the next G-7 meeting.
Finally, since the yen has been consistently managed and misaligned for so long, it may be necessary for both the U.S. and Japanese governments to work cooperatively with the governments of other major currencies to realign the value of the yen to reflect its real value.
What do you want the U.S. to do about this problem?
It is time for the U.S. to demand that the Japanese allow the yen to return to its true value at between 95¥ -100¥ to the dollar, thus accurately reflecting the country's economic fundamentals. The U.S. should insist that the IMF convene a special session to reach a multiparty agreement dealing directly with the destabilizing effects of misaligned currencies, excessive foreign reserves and trade balances. Our government must demonstrate its opposition to any country seeking economic advantage through a weak currency.
Should Congress take action?
Absolutely. Congress should considerably tighten current law so that the Treasury Department can no longer deny economic realities by routinely reporting that no U.S. trading partner, including Japan, has taken action to manipulate its currency to gain an unfair trading advantage. Furthermore, changes to this law should incorporate specific U.S. policy actions to be taken when currency misalignment is uncovered, including language stating that the practice of fundamental currency misalignment constitutes an unacceptable unfair trade practice enforceable under U.S. trade law.
How big of a factor is the weak yen in supporting Japanese auto exports?
The Japanese government's policy is to stimulate Japan's economy via export growth. Thanks to the weak yen, more than half (52%) of all automobiles manufactured in Japan in 2006 were produced for export to other countries, exceeding 50% for the first time in 19 years. In fact, even as demand within Japan for new autos declines, Japanese companies are adding production capacity to Japan-based facilities, reactivating assembly lines, adding workers and postponing planned factory closures as they move to export ever greater numbers of vehicles.
Are most Japanese cars sold in the U.S. made in America?
No. While Japanese automakers have built manufacturing facilities in the U.S. since the 1980s, they still export as many vehicles to the U.S. as they did 20 years ago (2.2 million a year). The weak yen has caused a surge of auto exports from Japan to the U.S., its largest market. These exported vehicles are primarily SUVs, trucks and luxury vehicles. In fact, almost half of all Toyotas sold in the U.S. market in 2006 were built not in America, but in Japan by Japanese workers for export directly to U.S. dealerships.
Don't Japanese companies employ just as many U.S. workers as you do?
No. GM, Ford and DaimlerChrysler directly employ some 350,000 U.S. autoworkers compared to 75,000 U.S. autoworkers employed by Japanese companies. Japanese companies not surprisingly have most of their workers in Japan, where they employ 209,000 autoworkers. U.S. auto companies are responsible for over seven million additional jobs, and the U.S. companies purchase 80 percent of all U.S. automotive parts and components. This $171 billion in annual purchases by U.S. companies provides hundreds of thousands of jobs in the automotive supplier and commodity industries, which have facilities in all 50 states.
But don't the Japanese companies' U.S.-based manufacturing plants support additional American jobs by purchasing auto parts made in the U.S.?
Eighty percent of U.S.-produced auto parts are purchased by GM, Ford and DaimlerChrysler. By contrast, on a fleet average, less than 50 percent of the auto parts in Japanese cars sold in the U.S. are domestic. The other 50 percent or more are imported from Japan.
Are others voicing concern about the value of the Yen?
Yes. European finance ministers are now strongly urging the Japanese to strengthen the yen, and leading publications including the Economist and the Financial Times have called for an end to the weak yen policy. While the Bush Administration has yet to take action, there are growing calls in Congress for Japan to address this problem.
Don't all central banks intervene in the markets?
There is an enormous difference between routine central bank actions to control domestic inflation and currency intervention. A recent study by the U.S. Federal Reserve Bank concludes that Japan is the only developed country that actively manages its currency. More telling, the Japanese government only manages its currency in one direction — to weaken the yen. Their government never intervenes, either financially or through official government statements, to strengthen the yen.
