The U.S. Treasury Department said it will press Japan to refrain from competitive devaluation while stopping short of accusing it of manipulating the yen in a report on exchange rates.
The Treasury will pressure Japan to adhere to international commitments “to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes,” the department said in its semi-annual currency report to Congress released in Washington yesterday. The report also declined to name China a currency manipulator.
“This is a shot across the BOJ’s bow,” Kit Juckes, a global strategist at Societe Generale SA in London, said in an e-mail. “Everyone still supports Japan’s fight against deflation, but the U.S. would much rather the yen did not weaken significantly further.”
The Bank of Japan (8301) surprised markets on April 4 by doubling monthly bond purchases to almost match the Federal Reserve’s monetary easing, and by setting a two-year horizon for achieving its goal of 2 percent inflation. BOJ Governor Haruhiko Kuroda said yesterday there’s no time limit to the stimulus.
The yen has depreciated against all 16 of its most-traded peers since April 4, declining 2.2 percent to the U.S. dollar, 3.5 percent to Europe’s 17-nation common currency and 2.8 percent to Australia’s dollar.
“Yen moves have been too rapid for the U.S. to applaud Japan’s battle to end deflation,” said Yasuhide Yajima, chief economist at NLI Research Institute Ltd. in Tokyo, an affiliate of Nippon Life Insurance Co., Japan’s biggest life insurer. “Japan will have to show fiscal plans and means to strengthen growth to make it clear it’s not depending only on weakening the yen to revive the economy.”
The yen traded at 98.37 per dollar at 5 p.m. in New York last night, from 99.68 a day earlier. It lost 0.8 percent this week in its second five-day drop.
Juckes said until recently, the U.S. had been supportive of Japan’s policies. “How could they not be after years of calling for them to combat deflation?” Juckes said. “Now, with the yen falling so far, so fast, the Treasury has changed its tune.”
Japan this month reached a deal with the U.S. on bilateral trade issues that clears the way for the world’s third-largest economy to join talks for the Trans-Pacific Partnership trade agreement as soon as July. The TPP would lower tariffs in countries that account for 40 percent of global trade.
The U.S. is reiterating statements by the Group of Seven and Group of 20 that macroeconomic policies “should be directed at the domestic economy and not at the exchange rate,” said Edwin Truman, a senior fellow at the Peterson Institute for International Economics in Washington.
The U.S. will be “watching to make sure that the focus of Abenomics is on stimulating the domestic Japanese economy and not its external sector,” Truman said, referring to the policies of Japanese Prime Minister Shinzo Abe.
In the report, the Treasury declined to name China a manipulator while saying that the yuan “remains significantly undervalued.”
“Intervention appears to have resumed, and further appreciation of the RMB against the dollar is warranted,” the Treasury said, using another term for the Chinese currency.
The Treasury said it will press China for policy changes and greater exchange-rate flexibility.
The Obama administration’s “refusal to label China a currency manipulator once again demonstrates President Obama’s deep-seated indifference to a major, ongoing threat to American manufacturing’s competitiveness, and to the U.S. economy’s return to genuine health,” Alan Tonelson, research fellow at the U.S. Business and Industry Council, which represents about 2,000 domestic manufacturers, said in a statement.
Treasury Secretary Jacob J. Lew traveled to China last month and said he pressed the country’s new leadership on the exchange rate.
A market-determined yuan is in China’s interest, and “they recognize the need to do it for internal reasons as well,” Lew said during his two-day visit.
Many U.S. corporations favor less confrontation as they seek access to China’s market. U.S. companies such as Apple Inc. and Wynn Resorts Ltd. (WYNN) make a substantial share of their sales in China, according to a Bloomberg Government analysis.
Global finance ministers, who will meet next week during the International Monetary Fund and World Bank spring meetings in Washington, signaled in February that Japan can stimulate its stagnant economy as long as policy makers cease publicly advocating a sliding yen.
The G-20 officials, meeting in Moscow, pledged not “to target our exchange rates for competitive purposes.” Japan wasn’t singled out for allowing the yen to drop and won backing for its push to beat deflation.
On South Korea, the Treasury report said it’s “problematic” that the government doesn’t publish intervention data on the Korean won. “Many market participants believe that the Korean authorities intervened in both the spot and forward currency markets to limit the pace of won appreciation, particularly in the latter part of 2012 and early 2013,” according to the report.
The Treasury released the twice-yearly report, due April 15, early for the first time since 2000. The last report, due on Oct. 15, was released on Nov. 27. The report due on April 15, 2012 came out May 25, 2012. Under former Treasury Secretary Timothy F. Geithner, approaching international gatherings, such as the IMF- World Bank meetings, were cited as a reason for delaying the currency report.
The Treasury report yesterday said Japan needs to “take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy, by easing regulations that unduly deter competition in its domestic economy.” Economic stimulus measures “will be supportive in the short term but cannot be a substitute for structural reform that raises productivity and trend growth.”
The Treasury’s statements about the yen are “about having some balance between Japan and China, said Domenico Lombardi, a senior fellow on global economics at the Brookings Institution in Washington. “The U.S. doesn’t want that its benign neglect about Japan is interpreted as a green light or relaxation for China to pursue exchange-rate devaluation.”
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