A Yen for Understanding

by Don Boudreaux on November 29, 2006

in Trade

Today’s Wall Street Journal contains this letter from Stephen Collins, President of the Automotive Trade Policy Council:

An Artificially Weak Yen Yields Subsidies for Japan

In his meeting with U.S. auto industry leaders, President Bush said, “My message to our trading partners is just treat us the way we treat you.” The

U.S. does not artificially weaken its currency, nor should Japan. As you are customarily an advocate of fair-market forces, it is surprising that you do not strongly share this principle (“Detroit and Bush,” Review & Outlook, Nov. 16).

Japanese intervention through purchasing massive amounts of dollars and “jawboning” has pushed down the yen’s value. Despite being the second-largest economy in the world, Japan is holding $885 billion in foreign exchange reserves, mostly in dollars. This policy of artificially weakening the yen provides vast export subsidies to Japanese industries and promotes unfair trade practices while protecting its domestic market. The competitive disadvantage becomes even more acute when you consider that this year some 2.3 million cars will be imported from Japan, which is double the amount from just a decade ago. That represents an immense loss of American production and jobs.

A 20% undervaluation of the yen vs. the dollar offers a significant across-the-board competitive advantage, from investment to purchasing to pricing to profit. Toyota, in its own financial statements, said that its net income increases by $300 million for every change of one yen against the dollar. In their own earnings reports,Toyota, Nissan and Honda said they earned an additional $7 billion in unexpected profits in the past 18 months due entirely to the undervalued yen. This is particularly striking, because Japanese automakers earn up to 70% of their global profits here in the U.S. market, while struggling to earn profits or posting losses in Japan.

After the meeting, the president acknowledged that General Motors, Ford and DaimlerChrysler are making “difficult decisions” to ensure the companies are competitive in a global economy. He added, “That’s good news for the American people, because the automobile manufacturers play such a significant part of our economy and a vital part of our employment base.” The president is right. An artificially weak yen can only undercut our efforts and the health of America’ss manufacturing base.

Stephen J. Collins
Automotive Trade Policy Council

And here’s a letter that I sent it to the WSJ in response:

Dear Editor:

Even if Stephen Collins is correct that the yen is artificially undervalued, the title of his letter – “An Artificially Weak Yen Yields Subsidies for Japan” – is mistaken (Letters, Nov. 29).

To keep the yen undervalued, Japan’s government must accumulate massive foreign-exchange holdings.  Acquiring these dollars and other currencies requires the Japanese government to tax its citizens either directly or surreptitiously through inflation.  This policy harms rather than helps the Japanese people – hardly a subsidy “for Japan.”

And while some Japanese exporters might benefit from an undervalued yen, so, too, do American consumers.  We get automobiles and other Japanese-made products in exchange for oodles of tiny monochrome pictures of dead American statesmen.  Now that’s a subsidy!

Donald J. Boudreaux

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triticale November 29, 2006 at 7:27 am

Actually, those portraits of dead presidents, altho the spectrum is limited and unrealistic, are not monochrome.

More seriously, I remember just a few years ago, how horrible it was that the current President had mismanaged the economy suchly that the dollar was "weak" against other currencies.

Peter Risager November 29, 2006 at 8:16 am

The American Auto industry sure is doing what it can to keep competition out. If it is so cheap for Toyota to produce in Japan, why do they keep opening factories in the US? Why just last week a factory producing trucks opened in Texas, creating jobs for American people. Add to the mix that the so called American automobiles are made of alot of parts manufactured abroad, you have some conundrum. If Toyota manufactures 70% of an automobile in the US and Ford manufactures 40% of an automobile in the US, which of the two is more American?

Bill Wadell and Kevin Meyers have written extensively on the subject over at: http://www.evolvingexcellence.com/blog/

David Z November 29, 2006 at 8:21 am

This situation is not as one-sided as it might appear. Bretton Woods, making the USD the world's reserve currency started the problem, which was further exacerbated by Nixon's repudiation of convertibility. As the FED continues to inflate the US money supply in the neighborhood of 6-7%, foreign central banks are all but obligated to continue buying US securities to prop up or maintain the value of the USD reserves they've accumulated.

Slocum November 29, 2006 at 9:41 am


Your argument seems to be that if foreign governments want to subsidize exports to the U.S. thereby providing us all good, inexpensive products (e.g. Japanese cars) then so much the better.

But why aren't such subsidies like, the 'curse of oil' where manna from heaven (in the form of natural resources) tends to prevent the development of the economy? If the rest of the world were willing to provide *all* of our material needs in exchange for pictures of dead presidents, would that be an unalloyed good thing? Sure, we'd have lots of stuff, and plenty of free time, but our skills and productive capacity would wither away to nothing. And when the well of free goods ran dry, we'd be in terrible shape, wouldn't we?

JohnDewey November 29, 2006 at 10:14 am


The U.S. economy is developing just fine, despite the current high levels of imports.

U.S. GDP is still increasing. The service sector is growing slightly faster than the goods-producing sector. But the latter is still growing. Why should we believe it will stop? And even if it did, why would that matter if the service sector continues its strong growth? Government and private service sector employ nearly 85% of all workers.

Bruce Hall November 29, 2006 at 10:42 am

It's a simply proposition: without currency manipulation, MANY Japanese and Chinese manufacturers would either not exist today or would be considerably less successful.

Now, to argue that it is good for the American CONSUMER to have access to subsidized goods is absolutely true… as long as those consumers are not employees of American manufacturers, their suppliers, and surrounding communities being undermined by this an other questionable trade practices.

And to argue that countries like Japan and China are being harmed by such trade practices is absolutely true… as long as you discount completely the tremendous wealth being accumulated there.

You can "prove" that consumers in Japan are being "harmed" by currency manipulation that keeps their currency artificially low on the internation market: however, much of Japan's consumer problems now stem from population dynamics, not because they have healthy industries. http://www.mofa.go.jp/j_info/japan/socsec/ogawa.html
Also, Japan had to adjust from the excesses of the 90s… many of us remember what went on then.

China, on the other hand, does not shown the great "harm" as the rapid rise of their industries have been a boon to millions. Does China have problems, sure… but not from currency manipulation.

Also consider…
* falling dollar (deficit driven?) vs. Euro and other non-manipulated currencies (could that possibly mean OIL will cost more in the future)

* falling home prices (despite your fine analysis that homes are actually cheaper per square foot now than 25 years ago… where oh where has my equity gone?)

Once again, it boils down to one axiom: low prices are always good… despite the cost personally, societally, or strategically. And economist wonder why they are the Rodney Dangerfields of academia.

josh November 29, 2006 at 11:14 am

Strategically? What sort of game are we playing and how do I know if we are winning?

In the long run it's pretty hard to argue that low prices aren't a good thing. There are of course costs to those who lose their jobs, but they find new ones, and on the whole, ones that allow them to gain more goods and services for their work than those they had before, thanks to the lower prices they'll pay for those goods and services. It's by no means instantaneous, but it's pretty undeniable that in the long run and on the whole, people at every level of human capitol are being made better off by this process much faster than they are being made worse off.

JohnDewey November 29, 2006 at 11:21 am

bruce hall: "where oh where has my equity gone?"

I don't know. Where do you live? My home in north Texas has continued to appreciate, though hardly as fast as some realized for a few years in the boom states of CA and MD.

My neighbors who left California a few years ago pocketed a few hundred thousand. They seem happy they were able to find someone who'd pay inflated prices and allow them to get out.

Bruce Hall November 29, 2006 at 11:32 am


No argument with the notion that low prices are a good thing… I only express concern for the PROCESS presently producing those low prices.

As Col. Klink used to say, "Ve haf our vays"… and they are not always necessarily the best.

Slocum November 29, 2006 at 11:56 am


The U.S. economy is developing just fine, despite the current high levels of imports."

Perhaps (provided you don't live in Michigan, Ohio, etc). But really, I'm more interested in the in-principle question. Why can unearned oil wealth retard development of economies (as it seems to do) but not unearned 'subsidy wealth'? It seems that the effect in both cases would be similar.

Mr. Econotarian November 29, 2006 at 1:34 pm


"In May of 1980 the Japanese Government promised the Carter Administration to encourage the Japanese automobile industry to invest in the U.S. and to purchase U.S. built automobile parts."


"On May 1, 1981, the government of Japan announced that it was voluntarily limiting the number of automobiles it exported to the U.S. market for a two year period. The Japanese did not jump into this action; they were pushed…"

"Although the decision to go for VERs (voluntary export regulations) represented the triumph of domestic priorities, the tactics employed by the Reagan administration to secure the VERs did not damage U.S. foreign policy objectives. Far from angering an ally, the U.S. Trade Representative gently convinced the Japanese that their foreign policy interests would be damaged by the animosity that many Americans would feel towards them if they were deemed responsible for causing one or more U.S. automobile giants to go bankrupt. The 1981 automobile "non-agreement" generated relatively little anger in Japan…"

"From the point of view of economic theory, the decision to press the Japanese for quantitative export restraints was an excessively costly approach to the domestic automobile problem, no matter how politically convenient and foreign policy-neutral the VERs might have been. Even if one accepts the argument that no administration should have adopted a dogmatic free trade philosophy at a time when bankruptcies of corporations the size of Chrysler or Ford were a clear and present threat, the form of protection selected was not optimal. There were better ways for the federal government to provide breathing room for the industry and to help make it more competitive. When stripped of the euphemisms used to make them politically palatable, Japan's "voluntary" export restraints were virtually identical in economic terms to imposition of unilateral import quotas…"

" In economic terms, export restraints had begun causing a massive transfer of income from American car buyers to automobile makers in both Japan and Detroit–a process that would continue for several years.

"Brookings Institution economist, Robert Crandall, calculated that the prices of Japanese cars in the United States by mid-1984 had increased 20 to 30 percent–between $1,500 and $2,500–over what they would have been in the absence of de facto trade barriers…"

"American consumers were not the only ones blindsided by the Japanese VERs. The Big Three U.S. producers eventually suffered indirect damage that they had not foreseen. The more established Japanese car exporters to the U.S. market at this time–Toyota, Nissan, Honda, and to a lesser extent, Mazda and Suburu–suffered no financial damage from the restraints. Quite the contrary, they enjoyed windfall profits, or what economists call economic rents, that would help make them an even greater competitive threat…"

"The larger Japanese companies did not distribute their windfall profits to shareholders. Instead, they spent the money on research and development to produce cars more efficiently and with even higher quality. They enhanced their technology, added new models at a faster than usual pace, and installed flexible manufacturing systems in their assembly plants to permit quicker responses to shifts in consumers' tastes. In short, the accelerated product shift into mid-size and luxury cars facilitated by the VERs upgraded the Japanese into a "greater threat in market segments traditionally held by domestic manufacturers," according to a leading Wall Street auto analyst.(47) Detroit's success in convincing Washington to limit import competition was a pyrrhic victory in some respects."

Morgan November 29, 2006 at 1:43 pm

Maybe the Japanese government expects that their population will be really old and unproductive soon, and plans to use an enormous pile of dollars to purchase American workers' output in the future.

In that case, manipulation of exchange rates is like a forced austerity/savings policy (a bit like Social Security). It reduces demand at home while maintaining total productivity, the fruits of which are sold overseas. A hidden tax.

The pile of dollars resulting from this hidden tax allows a future claim against American products and services that can help see the Japanese population through its dotage.

JohnDewey November 29, 2006 at 1:49 pm

"Why can unearned oil wealth retard development of economies (as it seems to do)"

I don't understand. Consider all the money that poured into Texas, ignited by its oil boom, in the middle of the 20th century. It hardly retarded growth of the Texas economy. In fact, the wealth accumulated by north Texas oil tycoons probably allowed them to take more risks in supporting the grand vision that evolved into modern Dallas-Ft Worth. FYI, Dallas-FortWorth is now home to more Fortune 500 headquarters than any other city.

ed November 29, 2006 at 7:17 pm

The subsidy for the US is cheaper debt, and massive overinvestment in non-tradables, which serves to support the feeling that the economy is Ok. With easy money from abroad, you have a low savings rate. Yes, a lot of manufacturing jobs in S.E. Asia are "artificial", as is the case with lots of jobs in US housing, finacial and service sectors. The problem is that with a low savings rate it is more dificult to switch back to a more equilibrated model.

JohnDewey November 30, 2006 at 10:08 am

ed: "With easy money from abroad, you have a low savings rate."

Are you saying that "easy money" causes the low savings rate? Does that mean that absent the "easy money" borrowers would pay higher interest rates and attract domestic savings? Why wouldn't the higher interest rates just attract more savings from foreigners?

Karl February 9, 2007 at 6:36 pm

Your response to the APTC's letter is profoundly unpersuasive. The Japanese government has not, in fact, had to impose onerous taxes (Japan's tax burden as a share of GDP is as low as America's) or surreptitious inflation (Japan has suffered deflation for going on ten years) to amass its foreign exchange holdings. As for the supposed boon of cheaper Japanese cars in the U.S. market, I would observe that Japanese automakers appear to be keeping much of their exchange rate windfall to themselves, in the way of record profits. I cannot understand how any economist worth his salt could possibly endorse begger-thy-neighbor trade strategies calculated to spur exports to the United States, particularly given the long term damage that's being inflicted on U.S. manufacturers that might otherwise be perfectly competitive.

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