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March 20, 2008. September 5, 2007. Introduction

The rapid depreciation of the value of the dollar on foreign exchange markets is causing fundamental changes in the trading relationships between the United States and other nations whose currencies have appreciated lately. This is raised concerns that Japan may intervene in currency markets for the first time since March 2004 to shore up the value of the dollar and slow the appreciation of the yen. Japan has conducted such intervention in the past by purchasing dollars and selling yen on foreign exchange markets. Japan's past intervention to slow the upward revaluation of the yen raised concerns in the United States and brought charges that Tokyo was manipulating its exchange rate in order to gain unfair advantage in world trade. This coincided with similar charges being made with respect to the currency of China. In the 110 th Congress, H.R. 2886 (Knollenberg)/ S. 1021 (Stabenow) (Japan Currency Manipulation Act) would require negotiation, reports, and other action with respect to Japan's currency actions. Although, Japan claims that it has not intervened in foreign exchange markets since March 2004, some claim that Japan still "talks down the value of the yen." Since March 2004, the Japanese government has not intervened significantly in currency markets to support the value of the dollar. Figure 3 also shows that despite heavy buying (or selling) of dollars during certain periods of time, the intervention seems to have had little lasting effect. This multiplies the effect of the intervention. of $1,314 billion. Figure 4 shows Japan's currency intervention in terms of annual rates of change in its foreign exchange reserves and the yen/dollar exchange rate. In both reports, Treasury did not find currency manipulation by any country, including by Japan. GAO reported that Treasury viewed "Japan's exchange rate interventions as part of a macro-economic policy aimed at combating deflation...."
In September 2005 testimony before the House Ways and Means Committee, Deputy Assistant Secretary of the Treasury David Loevinge stated that Treasury had discussed foreign exchange market issues with Japanese officials. In the IMF's August 2005 report on consultations with Japan, the Fund did not find currency manipulation, but noted that compared to the United States and the Euro Area, Japan stands out for its active use of foreign exchange market intervention as a policy instrument. The major policy options for Congress include the following:
let the market adjust (do nothing); clarify the definition of currency manipulation; require reports and negotiations; require the President to certify which countries are manipulating their currencies and take remedial action if the manipulation is not halted; and convene a special meeting of the International Monetary Fund to reach an agreement on the misalignment of the yen, oppose increased voting shares or representation in international financial organizations for any country that has a currency that is manipulated or in fundamental misalignment, initiate a dispute settlement case with the World Trade Organization (WTO), or block the Overseas Private Investment Corporation from providing services to Japan. 1498 (Ryan)/ S. 796 (Bunning) and H.R. Fair Currency Act of 2007. S. 1607 (Baucus). Currency Exchange Rate Oversight Reform Act of 2007. S. 1677 (Dodd). Currency Reform and Financial Markets Access Act of 2007.
The rapid depreciation of the value of the dollar on foreign exchange markets is mirrored by an equally rapid appreciation of currencies, such as the yen (and Euro). This has raised concerns that Japan may intervene in currency markets for the first time since March 2004 to shore up the value of the dollar and slow the appreciation of the yen. Japan has conducted such intervention in the past by purchasing dollars and selling yen on foreign exchange markets. This intervention has raised concerns in the United States and brought charges that Tokyo is manipulating its exchange rate in order to gain unfair advantage in world trade. This coincides with similar charges being made with respect to the currencies of the People's Republic of China and South Korea. In the 110th Congress, H.R. 2886 (Knollenberg)/S. 1021(Stabenow) (Japan Currency Manipulation Act), H.R. 782 (Tim Ryan)/S. 796 (Bunning) (Fair Currency Act of 2007), S. 1677 (Dodd) (Currency Reform and Financial Markets Access Act of 2007), and S. 1607 (Baucus) (Currency Exchange Rate Oversight Reform Act of 2007) address currency misalignment in general or by Japan in particular.
In the past, Japan has intervened (bought dollars and sold yen) extensively to counter the yen's appreciation, but since 2004, the Japanese government has not intervened significantly, although some claim that Tokyo continues to "talk down the value of the yen." This heavy buying of dollars resulted in an accumulation of official foreign exchange reserves that exceeded a record $979 billion (February 2008) by Japan. The intervention, however, seems to have had little lasting effect. Estimates on the cumulative effect of the interventions range from an undervaluation of the yen of about 3 or 4 yen to as much as 20 yen per dollar, although recent appreciation of the yen has erased most of such undervaluation.
In 2007, the U.S. Secretary of the Treasury indicated that it had not found currency manipulation by any country, including by Japan. An April 2005 report by the Government Accountability Office reported that Treasury had not found currency manipulation because it viewed "Japan's exchange rate interventions as part of a macroeconomic policy aimed at combating deflation...." In its May 2006 report on consultations with Japan, the International Monetary Fund (IMF), likewise, did not find currency manipulation by Japan.
One problem with the focus on currency intervention to correct balance of trade deficits is that only about half of the increase in the value of a foreign currency is reflected in prices of imports into the United States. Periods of heaviest intervention also coincided with slower (not faster) economic growth rates for Japan.
Major policy options for Congress include (1) letting the market adjust; (2) clarifying the definition of currency manipulation; (3) requiring negotiations and reports; (4) requiring the President to certify which countries are manipulating their currencies and taking remedial action if the manipulation is not halted; (5) taking the case to the World Trade Organization or appealing to the IMF; or (6) opposing any change in governance in the IMF benefitting Japan. This report will be updated as circumstances require.