It wasn't what leaders in Tokyo or Beijing wanted to hear, but Treasury Secretary-designate Timothy Geithner has wasted no time making it clear that the Obama Administration will oppose any moves by Japan or China to weaken their currencies. While Japanese exporters like Sony (SNE), Nissan (NSANY), and Toyota (TM) all expected to post operating losses as the yen soars to near-record highs against the dollar, Geithner told the Senate Finance Committee at his Jan. 21 confirmation hearing that the Obama Administration will frown on attempts by Japan to weaken its currency. "I believe that it's very important for the U.S. and for the global economy that our major trading partners operate with a flexible exchange rate system, in which market forces determine the value of exchange rates," he said after he was asked about the possibility that Japan may intervene to weaken the yen.
Geithner also issued a thinly veiled warning to the Chinese authorities about its currency. The yuan, unlike the yen, doesn't float freely and trades within a narrow band. Asked if China's "manipulation" of the yuan is a concern, Geithner said: "I do believe it is a significant issue." Those comments will also likely be unwelcome in China, which on Jan. 22 said gross domestic product growth in the three months through December slipped to 6.8%, down from 9% the previous quarter. That's well below the 8% level regarded by economists as necessary to generage enough jobs to accommodate new entrants into the labor force.
Tough on Japanese Exporters
In Japan, the timing of Geithner's comments could hardly be worse for Prime Minister Taro Aso's ailing government. During 2008 the buying power of the yen surged 19% against the dollar. Against the euro and the pound, the Japanese currency gained even more, rising 22% and 40%, respectively, making life tougher for Japanese exporters. Today, the yen is still hovering around 13-year highs against the dollar and record highs against the euro and pound. While the Ministry of Finance hasn't intervened directly in the currency markets since 2004, in recent weeks authorities have repeatedly hinted that, with the yen at historical highs and the economy mired in recession, a yen sell-off could be imminent.
With economic conditions worsening, the Bank of Japan today cut its GDP growth forecast and now believes Japan's economy will contract for two full years, through March 2010. The government also announced a $3.6 billion trade deficit in December; exports, hurt by the strong yen and weakening global economy, slumped a record 35%, compared to a year earlier. Barclays Capital (BCS) estimates the Japanese economy contracted 0.6% in 2008 and may fall a further 4.6% this year.
Despite Geithner's words, Japanese Finance Minister Shoichi Nakagawa once again appeared to hint at possible intervention. "Rapid moves are not good, so I am watching the moves carefully," Nakagawa told Reuters. When asked about the possibility of the government entering the currency markets soon, he added: "I should not comment on it. But we should always be thinking about doing what may be necessary."
In some respects, it's surprising the Japanese government hasn't stepped in to weaken the yen already. According to the Bank of Japan, in December the yen reached a nominal trade-weighted record. The bank also says that the yen's real trade exchange rate, which considers changes in price levels across countries, is at its highest level since November 2001.
A Floor of 80 Yen to the Dollar?
And with exporters reeling, Fujio Mitarai, chairman of Nippon Keidanren, Japan's most powerful business lobby, on Jan. 13 said Japan's Ministry of Finance may have to step in. "If this situation continues for a long time, I want [the government] to intervene," Mitarai, who is also chairman of Canon (CAJ), told reporters in Tokyo. "The current rise in the yen across the board is not good for the Japanese economy."
A lack of international support, characterized by Geithner's warning, is likely one reason for Japan's reluctance. Successful currency interventions are tough at the best of times. The last time the Ministry of Finance played the foreign exchange markets (ending in March 2004), it bought $390 billion of foreign currencies over a 15-month period—weakening the yen—to prop up the economy. But back then, the yen traded at around 104 to the dollar—far weaker than today's rate of 89 or the recent 13-year high of 87. And the global economy was in far better shape than today, and Japan could act with the support of the international community. "Now, every country has its own problems," says Seiji Shiraishi, chief economist at HSBC (HBC) in Tokyo.
Still, whether Geithner's remarks prevent Japanese authorities from weakening the yen will ultimately depend on what the currency does next. If the yen continues to rise, the government may feel it has no choice but to address the currency. Eisuke Sakakibara, a professor at Waseda University in Tokyo and a former top official in the Ministry of Finance who was nicknamed "Mr. Yen," says the government will more than likely step in to prevent further appreciation if the yen reaches 85 to the dollar. "[The government] will try to stop the exchange rate going below 80," Sakakibara said in an interview with BusinessWeek ahead of Geithner's comments.
Rowley is a correspondent in BusinessWeek's Tokyo bureau.