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• Federation of American Scientists

Summary

Japan's intervention to slow the upward appreciation of the yen has raised concerns in the United States and brought charges that Tokyo is manipulating its exchange rate in order to gain unfair advantage in world trade. This coincides with similar charges being made with respect to the currencies of the People's Republic of China and South Korea. In the 110th Congress, H.R. 2886 (Knollenberg)/S. 1021(Stabenow) (Japan Currency Manipulation Act), H.R. 782 (Tim Ryan)/S. 796 (Bunning) (Fair Currency Act of 2007), S. 1677 (Dodd) (Currency Reform and Financial Markets Access Act of 2007), and S. 1607 (Baucus) (Currency Exchange Rate Oversight Reform Act of 2007) address currency misalignment in general or by Japan in particular. In the past, Japan has intervened (bought dollars and sold yen) extensively to counter the yen's appreciation, but since March 2004, the Japanese government has not intervened significantly, although some claim that Tokyo continues to "talk down the value of the yen." This heavy buying of dollars has resulted in an accumulation of official foreign exchange reserves that exceeded a record $893 billion (June 2007) by Japan. The intervention, however, seems to have had little lasting effect. It may only have slowed the rise in value of the yen rather than reverse its direction of change. For the past few years, the yen has been depreciating and is now at a 20-year low. Estimates on the cumulative effect of the interventions range from an undervaluation of the yen of about 3 or 4 yen to as much as 20 yen per dollar. Private company estimates of the misalignment of the yen range from an overvaluation of 1.8% to an underevaluation of 29%. The median value of these estimates is that the yen is about 15% undervalued, but it is not known how much of the undervaluation resulted from market forces and how much from intervention. In 2006, the U.S. Secretary of the Treasury indicated that it had not found currency manipulation by any country, including by Japan. An April 2005 report by the Government Accountability Office reported that Treasury had not found currency manipulation because it viewed "Japan's exchange rate interventions as part of a macroeconomic policy aimed at combating deflation..." In its May 2006 report on consultations with Japan, the International Monetary Fund (IMF), likewise, did not find currency manipulation by Japan. The criteria for finding currency manipulation, however, allows for considerable leeway by Treasury and the IMF. One problem with the focus on currency intervention to correct balance of trade deficits is that only about half of the increase in the value of a foreign currency is reflected in prices of imports into the United States. Periods of heaviest intervention also coincided with slower (not faster) economic growth rates for Japan. Major policy options for Congress include (1) let the market adjust ; (2) clarify the definition of currency manipulation; (3) require negotiations and reports; (4) require the President to certify which countries are manipulating their currencies and take remedial action if the manipulation is not halted; (5) take the case to the World Trade Organization or appeal to the IMF; or (6) oppose any change in governance in the IMF benefitting Japan. This report will be updated as circumstances require.

Related Legislation:
• H.R.2886
• S.1021
• H.R.782
• S.796
• S.1677
• S.1607
• S.20

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