U.S. President Donald Trump’s charge that Tokyo is manipulating the yen’s exchange rate lower — and blaming that as a key culprit behind the trade deficit that the United States has with Japan — is irrational and needs be clearly rejected. The criticism voiced by Trump and his team against China and Germany — the two other largest sources of the U.S. trade deficit — for the weakness of their currencies could also constitute a verbal intervention in the currency market by the U.S. administration. Prime Minister Shinzo Abe, when he holds the scheduled talks with Trump next week, should make the points clear and warn him against the confusion that his protectionist remarks could cause to the global economy.
“You look at what China’s doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies,” Trump reportedly said in a meeting with pharmaceutical company executives in Washington on Tuesday. His trade adviser Peter Navarro also slammed Germany for using a “grossly undervalued” euro to gain an unfair trade advantage over the U.S.
Japan has not intervened in currency markets since its monetary authorities carried out yen-selling and dollar-buying operations in November 2011. Trump’s attack on China’s currency policy is misguided because Beijing’s recent intervention is aimed at bolstering the value of its yuan against the dollar to stop the currency’s excessive downslide, which threatens to drive capital out of the country. Germany cannot push the euro lower since the monetary policy of the eurozone countries is monopolized by the European Central Bank.
Trump apparently views the Bank of Japan’s monetary easing operations since 2013, including its massive asset purchase programs to inject more money into the market and the negative interest rate policy the central bank adopted last year, as a scheme to drive the yen lower against the dollar to benefit Japanese exporters. True, the yen, quoted around 85 to the dollar when Abe returned to the government’s helm in December 2012, now stands around 113 — a steep depreciation indeed. The weaker yen inflated the earnings of export-led businesses and pushed up share prices, serving as key pillars of the prime minister’s drive to revive the economy.
But the yen’s decline was the result of the gap in interest rates and economic conditions between Japan and the U.S. — as the yen, with relatively lower interest rates vis-a-vis the dollar, was sold in the currency market. As the government has emphasized, the BOJ’s monetary stimulus is aimed at busting deflation in Japan. Every government adjusts monetary policy to address its domestic problems, which does indeed affect currency markets. When the U.S. Federal Reserve introduced large-scale quantitative easing in the wake of the financial crisis in 2008, Japan suffered from the yen’s steep upturn.
Trump needs to be informed that the yen’s recent depreciation after his November election victory, following the uptrend that continued earlier in 2016, was caused by the widening interest rate gap between the two countries as long-term U.S. rates were pushed up by expectations that Trump’s promised tax cuts and infrastructure investments would drive U.S. growth and expand its fiscal deficits. The U.S. president needs to realize the contradictions between his fiscal policy and his trade policy, in which he appears to be pursuing a weaker dollar by criticizing the weak currencies of the U.S.’ key trading partners.
Behind Trump’s criticism of yen’s depreciation is the misguided notion that the U.S. incurs trade deficits chiefly because its trading partners unfairly keep their currencies weak — and that to reduce the deficits the weakness of those currencies need to be corrected. The Plaza Accord of 1985, in which five major economies including the U.S. and Japan agreed to take steps to guide the dollar lower, did not eliminate the U.S. trade deficit.
Misguided or not, Trump’s remarks affect currency markets. They are the latest in a series protectionist pitches by him that may or may not be based on a correct understanding of facts. Abe needs to correct the U.S. president’s views when they meet in Washington. In pulling the U.S. out of the Trans-Pacific Partnership deal and seeking bilateral trade pacts instead, Trump says his administration will seek to include measures against currency manipulation in agreements with countries that have large trade surpluses with the U.S. Abe should stand firm against such an idea.
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