A Yen for Understanding

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, iin 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
President
Automotive Trade Policy Council
Detroit

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!

Sincerely,
Donald J. Boudreaux

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