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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