Oct. 16 (Bloomberg) -- U.S. President George W. Bush arrives in Asia tomorrow to discuss trade, the war on terrorism and Iraq reconstruction. Another issue will dominate his time, and the headlines: currencies.

It's rare indeed for heads of state to discuss exchange rates, let alone have them eclipse other pressing issues. But that's the rhetorical and policy tempest into which Bush steps as he arrives here in Tokyo tomorrow.

Bush's team bears some blame. His finance minister, John Snow, who's been calling on China to let the yuan float freely, started the latest currency tussle. U.S. manufacturers, who've shed 2.5 million jobs on Bush's watch, say China uses a currency peg to the dollar to gain an unfair trade advantage.

The good news is that the U.S. is shifting its focus in a more logical direction: Japan. It's here Bush could help end Asia's escalating currency war, whereby neighbors try to outdo one another in making their economies more competitive through low exchange rates.

Attempts by the wealthy U.S. to make a scapegoat of developing China have further damaged Washington's image in Asia. At a time when less U.S. investment is flowing this way and the economic outlook is murky, the White House's fixation with China is misguided. In 1997, the U.S. begged China not to unpeg its currency. Now, that same peg is killing the world's biggest economy?

Beggar Thy Neighbor

Until now, the fact Japan spent at least 13.5 trillion yen ($123 billion) this year manipulating its currency was tolerated by Washington. That's changing, and for good reason.

``We'll talk about the currency with the Chinese and with my friend Prime Minister Koizumi'' of Japan, Bush told reporters in Washington. ``We expect the markets to reflect the true value of the currency.''

Targeting Tokyo's beggar-thy-neighbor policies could encourage Asians to let currencies rise versus the dollar, facilitating a necessary adjustment in global markets. Now that Asia is booming again, currencies should be allowed to rise. Yet that shift won't be possible until Tokyo stops manipulating the yen.

There's nothing wrong with central banks smoothing out sharp moves in currencies. It's another story for the world's second- biggest economy to spend the equivalent of entire Southeast Asian economies to boost exports. Tokyo is doing just that to avoid painful structural reforms.

Fetish

And if the region's biggest economy can manage its currency as obsessively as it does, why can't others? Aware of the hypocrisy surrounding the issue, smaller nations are following suit. On the one hand you have South Korea, which isn't hiding the fact it's been selling won. On the other, there are nations taking backdoor steps.

Taiwan, for example, is easing rules on offshore investment. Thailand will stop paying interest to overseas depositors who hold baht in checking and savings accounts in the nation to try to curb demand for its currency.

If only Asia would get over its weak-currency fetish. Now that it's home to the world's fastest growing economies, it stands to reason exchange rates should rise. Capital flows brought on by strong currencies would boost equities and lower bond yields, giving companies more latitude to raise funds. Low rates also would help develop an increasingly affluent middle-class.

Bush will preach the strong-currency gospel when he visits Indonesia, Japan, Singapore, the Philippines and Thailand. (He's visiting Australia, too, but Canberra has let its dollar surge 22 percent this year.)

APEC Forum

Currency issues will be especially prominent during his stop in Bangkok next week for the annual summit of the Asia-Pacific Economic Cooperation forum. Bush will also have to convince Asians the U.S. won't turn around and weaken the dollar.

The perception the U.S. wants a weaker dollar to boost its economy marks an intriguing reversal of fortune. If it's true, and many here think it is, the White House is criticizing China for having the very thing it desires: a competitive exchange rate.

As Bush makes his way around Asia, he's sure to notice China's rapidly rising clout. The U.S. is still the region's biggest trading partner and the dollar is still the currency of choice for central bankers and investors. But China's growing influence may startle Bush and his entourage.

The U.S. is having trouble creating new jobs, but Asian economies generally aren't. For that, many have China at least partly to thank. Trade between China and the rest of Asia is booming -- the country's imports rose 40 percent in September from a year ago to a record level -- and many governments are all too happy to live with the yuan-dollar peg. Asia is relying less on the U.S. for growth.

Economic Diplomacy

That's why Bush will have a hard time selling Asia on the idea that China's currency is a problem. What if Beijing is right and its financial system is too fragile to withstand a floating exchange rate right now? Why put the region's most dynamic economy at risk?

China also is doing a better job of economic diplomacy in Asia. Not only is it striking trade deals with neighbors, Beijing is also working overtime to assuage fears it means the region's economies harm. The Bush administration's best-known economic policies here are its dislike for China's currency peg and its belief Vietnamese catfish farmers are damaging U.S. producers.

Yet Washington would have an easier time convincing Beijing and other Asians to let currencies float freely if Japan would. Then, the U.S. would have a more receptive Asian audience for issues ranging from terrorism to Iraq to North Korea. The road toward a stronger Chinese currency -- and better Asian relations -- may very well run through Tokyo.