The U.S. Treasury Department on Tuesday urged Japan to refrain from conducting unilateral market interventions to stem the yen's appreciation and instead take steps to spur its economy and sharpen the competitiveness of Japanese firms.
"Rather than intervening to try to influence the exchange rate, Japan should take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy, increase the competitiveness of (its) firms . . . and raise potential growth," the department said in its semiannual Report to Congress on International Economic and Exchange Rate Policies.
The United States joined Japan and other Group of Seven advanced economies to step into the currency market on March 18 to weaken the yen following its sharp rise against the dollar in the wake of the March 11 earthquake and tsunami.
But Washington is critical of the unilateral currency interventions conducted by Tokyo in August and October amid calls by Japanese firms for arresting the strength of the yen. "In contrast to the G-7 joint postearthquake intervention in March, the United States did not support these interventions," the report said.
"The unilateral Japanese interventions were undertaken when exchange market conditions appeared to be operating in an orderly manner and volatility in the yen-dollar exchange rate was lower than . . . the euro-dollar market."
The latest report signals that Washington is likely to oppose any unilateral market interventions by Japan, leaving Tokyo in a dilemma between the need to fend off the yen's rise and further isolation among the G-7 members over currency policy.
The report also suggested Japan's market interventions were not very effective, saying that although the yen depreciated at the time of intervention, the exchange rate retracted its steps subsequently, leaving the yen over 4 percent stronger against the dollar than it was at the start of the year.