Commentary: Don't Let Japan's "Mr. Dollar" Get Away With It

Zembei Mizoguchi is driving down the yen. He ought to be stopped

In Tokyo, he's a faceless bureaucrat in a town full of them. But in trading pits in London and New York, and among chief financial officers from Detroit to Stuttgart, Vice-Minister of International Affairs at Japan's Ministry of Finance Zembei Mizoguchi enjoys celebrity status. And with good reason: This financial diplomat -- call him Mr. Dollar -- is the architect of perhaps the biggest single-handed currency intervention since World War II. On Mar. 5 alone, the Bank of Japan, acting on orders from Mizoguchi's ministry, embarked on a record $20 billion yen-selling frenzy that pushed the dollar to a five-month high of 112 to the greenback.

The one-day blitz came after the Japanese spent $100 billion buying dollars and selling yen during the first two months of 2004 -- on top of $182 billion last year. Tokyo's goal in 2003 was to slow the yen's rise and give Japan's exporters time to prepare for another strong-yen era. But now the Japanese seem intent on weakening their currency outright. Mizoguchi's goal may even be to boost the dollar as high as 120 yen, and he has all the ammunition he needs. On the same day as the BOJ went on its most recent dollar-buying binge, Japan's parliament authorized spending a further $360 billion this year to drive down the yen's value.

Japan's trading partners shouldn't let Mr. Dollar get away with it. True, Japanese financial authorities have long used currency manipulation to goose exports. And it's a gambit the U.S. itself employed to carry out a major dollar devaluation against the yen and other currencies in the famous 1985 Plaza Accord. But what's going on now is different. This time, Japan's currency meddling smacks of pure mercantilism and ought to be loudly shouted down. With Japan's economy on the mend -- it grew at a rate of 6.4% last quarter -- there is no justification for it. The Europeans are hurting from both dollar and yen weakness, and Tokyo is courting a backlash from Washington in this Presidential election year.

The Japanese have been bent on undercutting the yen ever since it started strengthening last August. On Mar. 12, U.S. Treasury Secretary John W. Snow warned about the dangers of "propping up currencies" artificially in a brow-beating directed at Japan. But the Bush Administration has reacted to Japan's intervention mostly with studied inaction. One reason: Mizoguchi & Co. are recycling their dollars into the Treasury market at a time when a $550 billion current-account deficit makes the U.S. dependent on the kindness of foreigners. Washington needs to borrow about $1.5 billion abroad every day. "Snow is aware of the role Japan's intervention plays in keeping U.S. rates low," says David Gilmore, a partner at Foreign Exchange Analytics, a currency consultant in Essex, Conn. Prime Minister Junichiro Koizumi also appears to be cashing in chips won from the White House through Japan's staunch support for the Iraq War.

But the Bush Administration's see-no-evil policy is shortsighted. With Japanese interest rates near zero, Japan can lower the yen at little cost by selling low-yielding bonds to Japanese investors and using the proceeds to buy Treasuries. "Japan's currency debasement game can go on forever as long as the Finance Ministry has the authority to keep borrowing," notes Carl B. Weinberg, chief economist at High Frequency Economics Ltd. What's more, Tokyo authorities have actually let the yen depreciate against the euro by 10% since the start of 2003. Big Western multinationals are howling. The Japanese "are keeping their currency artificially weak against the dollar and euro and really reducing the competitive position" of U.S. and European companies, says General Motors Corp. (GM ) Chairman G. Richard Wagoner Jr.

Japan is making a mockery of the Group of Seven's commitment to foreign-exchange market flexibility by acting as though it has carte blanche to pursue its own economic agenda. But Japan Inc. is now strong enough to handle a yen that trades at 105 to the dollar. So heads of states, finance ministers, and central bankers have to start some serious arm-twisting. Only then will Japan's Mr. Dollar let the free market be free.

By Brian Bremner

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