This piece was originally published at Japan Economy News on February 7, 2006. What follows is a slight revision to that text.

I said it to anyone that would listen six months ago: When Toyota starts to really catch GM, we’re in for a war of words over currencies. And now that Toyota’s reported 7.3% gain in quarterly profit is fixing GM in the headlights, the war of words is heating up…

And here it comes, just ahead of the G7 meeting and the BOJ’s upcoming February governor’s meeting. It started on Sunday, when the Guardian, in a piece entitled “Japan is currency cheat, claims US,” reported that:

Congress urges Treasury Secretary Hank Paulson to use this week’s meeting of G7 finance ministers to accuse Tokyo of fixing the exchange rate of the yen…Michigan [Democratic] Congressman John Dingell sent the President a letter last week - publicised on his website under the title, ‘Dingell to Bush: You Just Don’t Get It‘ - urging the White House to prosecute Japan for currency manipulation.

I found that interesting, given that three days before, on February 1st, Hiroyasu Watanabe, former President of the Policy Research Institute at Japan’s Ministry of Finance, told reporters in Tokyo, “I don’t think the (G7 meeting) will pick up the yen weakness specifically as an agenda item.” Mr Watanabe might be correct, or he might have been speaking prematurely, but in either case, that’s not bound to stop the US Congress from pressuring the White House on Japan’s “currency manipulation.”

Given the fact that the Bank of Japan has been roundly criticized by outsiders as having been politically pressured into not raising the benchmark interest rates last month, it seems a tad hypocritical that US lawmakers are engaging in exactly the same practice with the opposite end: They want to see Japan raise its interest rates so that the yen will stop getting weaker against the dollar. Let’s pause on thinking about whether or not that theory could be true (or ridiculous) for a moment and look at exactly what Congressman Dingell had to say in his “You Just Don’t Get It” letter to President Bush (excuse the long excerpt, it’s worth it):

…When it comes to analyzing the problems facing American auto manufacturers, and American manufacturers in general, the Administration simply does not get it.

In my home state of Michigan – the heart of the automotive sector – auto industry dependent jobs make up almost 22 percent of the state’s workforce. I am sure American auto workers feel their jobs, families and communities are ‘relevant’. I am sure that every worker, whether white or blue collar, are insulted that you term the products of their livelihood irrelevant.

Our automakers face increasing healthcare and pension costs which foreign automakers do not. These problems are compounded by the Administration’s failure to prosecute unfair trade practices by our competitors and the lack of support for my legislation that would fight currency manipulation by Japan and China. Health care costs force up the price of an American car by $1,500, currency fixing adds an additional $3,000 to a mid-size car and $10,000 to an SUV. The auto industry doesn’t need a bailout- they need effective policies. (Bold added)

Effective policies? In other words, market intervention? Protectionism? Political pressure on the treasury? How is that not a bailout? Better yet, where does Toyota fit in? This week, the Wall Street Journal reported that:

Toyota executives have expressed concern over the possibility of political backlash as it usurps market share from GM, Ford and Chrysler. Toyota says it is working to increase the number of vehicles it makes in North America, but in 2006 imported cars and trucks sold by Toyota in the U.S. rose 37% to 1.2 million vehicles (out of total sales of 2.5m), while sales from North American production were for the most part unchanged.

Ok, so Toyota is sticking it to its rivals and getting the best of them, which is taking advantage of a business situation. It may be ruthless, but that’s business. I don’t see many US Congressmen complaining about Microsoft’s ruthless business tactics. But ‘currency manipulation,’ and not Toyota’s business practices, continues to be the talk of the day. Last September, the big three US automakers published a joint paper in which they claimed that the yen is undervalued by 15 percent to 25 percent because of massive intervention by the Bank of Japan. The paper came to the conclusion that “currency manipulation by Japan is a serious unfair trade practice impacting U.S. auto manufacturers today (that) provides an average subsidy of thousands of dollars for each and every car it exports to the United States.” Then, on Tuesday February 6, Market Watch published this short piece concerning Treasury Secretary Henry Paulson’s comments to Congress:

There is no evidence of intervention or manipulation by the Japanese government to keep the yen weak, Treasury Secretary Henry Paulson told congressmen on Tuesday. The yen is trading at a 20-year low, Paulson acknowledged, “but as far as we can see there has been no intervention.” Paulson said he would be discussing the yen and other issues at the Group of Seven meetings this weekend in Germany. “It is my job to be vigilant and watch all currencies,” he said. Rep. Sander Levin, D-Mich., said the weak yen has helped Japanese automakers to capture the highest share of the U.S. market ever.

Now Henry Paulson is saying that there has been no currency manipulation, and, as Bloomberg also told us on February 6:

Japan hasn’t entered the currency market since March 2004. The Bank of Japan sold 14.8 trillion yen ($122 billion) from January through March 2004, following record sales of 20.4 trillion yen in 2003, to curb yen strength.

Interesting. So the whole theory is that Japan is now keeping the yen weak (currently 120.625) by keeping its interest rates low. Let’s remember, the Bank of Japan’s benchmark interest rate is 0.25%, which is higher than it was in 2004, when the BOJ kept rates at 0.10% for the entire year.

Let’s look at exchange rates for that year:

The average exchange rate on the JPY/USD for 2004? 108.17451

The low for the yen in 2004: 114.88

The high for the yen in 2004: 101.81

Now the US Treasury Department is saying that Japan hasn’t manipulated the currency markets since January through March 2004. On January 1, 2004, the yen was at 104.40 against the dollar. Ninety days later, on April 1st, just after the BOJ’s supposed three months of currency manipulation ended? On that day the rate was 104.40 - no move. And on the last day of 2004? 103.10 The yen gained strength in 2004.

Maybe what US automakers really need is for someone to bring that manipulation back…

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