Comparative Currency Policy

At the risk of turning this into the "Asian Currency Blog," I came across the following piece by an AEI scholar:

In a

earlier this month, four leading Democratic congressman urged action to pressure the Japanese to strengthen the value of the Japanese yen by selling off its reserves of dollars and euros. They noted that a weaker yen had artificially cheapened Japanese exports and they attributed the yen’s weakness to Japanese government policy.

...

The congressmen want the Japanese to sell their currency reserves to drive up the value of the yen at the very time that they are urging China not to intervene in its foreign exchange market.

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The U.S. approach to Japan affects the credibility of our approach to the vexing Chinese currency issue. U.S. policy has been to urge the Chinese toward a more market-determined yuan. An expression of dissatisfaction with market-determined rates in Japan would signal that U.S. currency demands are unreasonable and impossible ever to satisfy. That would be unlikely to further the legitimate U.S. and global interest in allowing necessary movements in the Chinese currency.

Notably, three of the four who signed the Japan letter also supported the China Section 301 petition.

ADDED:  Someone pointed out to me that the Economist (subscription only) has taken a somewhat different view:

Hank Paulson, America's treasury secretary, says he is not worried about the yen's weakness because it is market-driven and reflects economic fundamentals—namely low interest rates and a fragile economy. China, in contrast, is accused of manipulating its currency with heavy intervention.

Mr Paulson is being short-sighted. Even if Japan is not intervening to hold down its currency, the yen is still misaligned. A country with one of the world's largest current-account surpluses and low inflation (but no longer deflation) should have a much stronger currency. Japan's economy is no longer flat on its back. Last year it grew by an estimated 2.3%, and it is forecast to maintain a similar pace this year. As a result, Japan does not need such low interest rates or a super-cheap currency any more. Indeed, Japan's abnormally low rates could be viewed as a form of intervention to hold down the yen.

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A severely misaligned exchange rate calls for action. It is true, as Mr Paulson says, that Japan is not intervening to hold down the yen. But since Japan still holds almost $900 billion of foreign-exchange reserves, accumulated a few years ago when it was intervening, it is hard to claim that the currency is truly market-determined. Stephen Jen, an economist at Morgan Stanley, argues that Japan's Ministry of Finance should consider selling some of those reserves to break the one-way bet against the yen. There is a risk that such a move could itself upset financial markets. But the lower the yen slides, the greater the threat of an even sharper rebound.