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[marketmaven]

Treasury NOT DOING THEIR JOB on Currency Manipulation

Congress examines currency controls
Auto industry, manufacturers say yen, yuan hurt
May 10, 2007
http://www.freep.com/apps/pbcs.dll/article?AID=/20070510/BUSINESS01/705100402/1014

BY JUSTIN HYDE
FREE PRESS WASHINGTON BUREAU

WASHINGTON -- The same day that Toyota Motor Co. reported record profits boosted by $2.4 billion from a weak Japanese yen, three U.S. House committees held an unusual joint hearing on how Congress should deal with currency manipulation by Japan and China.

Spearheaded by U.S. Rep. Sander Levin, D-Royal Oak, the hearing began as Michigan lawmakers and Detroit automakers see an opening to press their case that Japan's weak yen hurts the U.S. auto industry, and a growing swath of manufacturers says China has stolen business by capping the value of its yuan. "The issue on the table today is not whether the United States needs to take action to respond to the interventionist policies of China and Japan in this key area, but what form that action should take," Levin said.

But several experts testified that Congress could do more harm to the U.S. economy than good if it strikes out at China, and that Japan's government had not interfered with the value of the yen in three years. Stephen Roach, chief global economist for Morgan Stanley, said sanctions by Congress against China could lead to higher inflation and interest rates in the United States.

"I sincerely worry you and the Congress are moving into very dangerous territory," Roach told Levin. "Sanctions on China could tip an already weakened U.S. economy into recession."

By weakening the value of a currency relative to the U.S. dollar, countries can make their exports cheaper to U.S. customers. Many lawmakers have been far more concerned with China, which keeps the yuan closely tied to other currencies, than with Japan, which hasn't directly moved in currency markets since 2004.

Detroit's automakers have been agitating for action against Japan for years, and independent experts say the yen is now undervalued, by as much as 20%. General Motors Corp. chief economist Mustafa Mohatarem said his estimates put the benefit of a weak yen to Japanese automakers in the United States at $13.5 billion a year.

"The government of Japan has created a one-way market for the yen," he said. "It can only go down, not up."

But Detroit automakers have been far more sanguine about China, where their businesses are growing. Mohatarem told the panel that while China's currency needed to rise, China is allowing it to do so at a faster rate than Japan.

While the Bush administration has held talks with China about its currency, it has refused to press Japan on the yen. Several bills in Congress would either attempt to force the administration to accuse China and perhaps Japan of manipulating their currencies, or allow U.S. businesses to request tariffs on imported goods due to currency manipulation by a foreign country.

Democratic leaders have said they expect to produce some sort of bill in this Congress. U.S. Rep. Barney Frank, the Massachusetts Democrat who oversees the House Financial Services Committee, suggested those who oppose congressional involvement should come up with their own ideas soon.

Democrats want to "change the situation in which growth in the economy as a whole and the increase in the well-being of the average worker has become disconnected," he said. "We believe this is one way to deal with that."

Contact JUSTIN HYDE at 202-906-8204 or [e-mail].