Weak Yen or Strong Products?

We're going to take an overdue look at an old wives' tale that materializes rather like unwelcome ghosts from time to time.

It is that the Japanese government has somehow manipulated the value of its currency, the yen, to benefit Japanese-based companies that do business in the United States and Europe, holding it artificially low so that the manufacturers are able to realize what amounts to a subsidy on products they build in Japan and sell abroad.

Indeed, this tale of the manipulated yen is far more spectral than, say, Casper, our friendly ghost of theatrical cartoon series fame. It raised its wispy head again late last year, this time in a letter from Rep. Joe Knollenberg (R., Mich.), published in the Wall Street Journal.                                   

In that letter, Knollenberg says, among other things, that "the Japanese government's policy of maintaining a weak yen is a real issue that deserves scrutiny. Since 2001, the Japanese government has intervened repeatedly in currency markets to artificially devalue the yen by upward of 30%."

OK, so far so good, though Knollenberg's characterization of the yen's devaluation as artificial might be open to scrutiny and discussion.

In fact, in a report labeled, "GAO Report to Congressional Committees, April 2005, International Trade," and titled, "Treasury Assessments Have Not Found Currency Manipulation, but Concerns about Exchange Rates Continue," the experts at the General Accounting Office said, "Treasury also did not find that Japan met the Trade Acts definition for currency manipulation in 2003 and 2004. Treasury officials told us that they viewed Japan's exchange rate interventions as part of a macro-economic policy aimed at combating deflation in Japan, and they expressed general skepticism about the efficacy of intervention to affect the yen's value."

We only bring all this up because Knollenbergs letter goes on to say, "As a result, Toyota and the other Japanese automakers receive a $4,000 to $14,000 subsidy on every vehicle they export to the U.S. Japan's currency manipulation is fueling the market share gains of Toyota, Honda and Nissan in the U.S. and putting downward pressure on UAW wages and benefits."

Well, whether Toyota benefits from the current disparity between the values of the Dollar and the Yen is beside the point. That's especially true because there have been times when the yen has been strong against the dollar and--if you follow the logic of Knollenberg's argument--that would seem to work against profitability.

Whatever the disparity currently might be today in early 2008, and whether it works for us or against us, the GAO and the Treasury Department have confirmed that there is no currency manipulation.  And we would be remiss not to note the observations of Donald J. Boudreaux, Chairman of the Department of Economics at George Mason University, responding to Knollenberg's commentary regarding hanky panky with the Yen:

So as the value of the yen falls, enabling (it is true) each dollar to buy more yen, another effect is that the nominal yen-price of Japanese-made cars rises, reflecting the yen's lower value.  The net result is no advantage to Japanese automakers seeking to sell more cars abroad.

Indeed, it's our view that currency markets are so vast and so dynamic that governmental action can make little difference in currency value, which is what the Treasury Department also says.

Is the yen weak? Yes, it is. The weakening Japanese economy, with a reduction of capital spending and slowing export volume to the U.S., is one important reason for that. By way of comparison and illustration, we might point out that the dollar isn't exactly robust these days. In fact, it's once again worth a bit less than the Canadian dollar. Is that because it is being manipulated by the U.S. government?

Further, allow us also to point out that collaborating with the Japanese government on the manipulation of currency values would, even if we would or could do such a thing, be of limited benefit to Toyota. That's because more than half of the vehicles we sell in the U.S. are assembled in North America, and because domestic content in those vehicles runs from 65% to 80%. Profits on domestic product are almost completely unaffected by the Yen's value.

Additionally, let nobody doubt that we price our vehicles according to the dynamics of the market. We do not price our vehicles according to swings in currency values. Our vehicles sell well, and are profitable, because our operations are efficient, because our vehicles represent quality and value, and because they represent the needs and wants of the public. Their profitability has nothing at all to do with some nefarious program of currency manipulation. That just isnt' how it works.

So, again, what were talking about here is an old wives' tale. Its a ghost story; one for which we've sought to add a little transparency.

~ Contributed by Bruce C. Ertmann, Corporate Communications

Comments

[driving courses]

I was just reading about how many Prius were sold last year I think the whole $ question is a sham. Toyota sell more cars because they have greater foresight than most other manufacturers. They also make the most reliable cars I've ever owned.

(comment edited to remove link - Roadmaster)

[aaron]

toyota attributed 15% of thier profits last quarter to yen values did they not?

I don't see mention of the massive yen carry trade. Do you guys have a position on this?

[StandardDetroitTalk]

My dad worked for Ford from his teens all the way through to retirement. I've lived in metro Detroit since the 1980s.

Over the years, I've watched the "Detroit" auto makers (whatever that means is subject to debate, as GM shuts downs factories in the U.S. and moves production rapidly to China - while simultaneously, Toyota and Honda open more U.S. plants, employing U.S. workers).

Detroit's problem is that management hasn't got a clue about the meaning of the term "contingency planning". Oil prices drop for a few years, and they switch over to making more and more enormous vehicles, while completely neglecting quality (over all), and gutting their fuel efficiency R & D.

Then they act completely *STUNNED* when they find out that oil prices eventually go back up again. It just "sneaks up on them" time and time again. Like clockwork, they announce "unfair competition".

Their executives sheepishly grin, and say "oopsie!", as they lay off thousands of workers, because 16mpg (today's SUVs, or yester-year's Grand Marquis -take your pick) isn't a good long term selling strategy.

Considering the salaries of these top decision makers (much higher than salaries of comparable executives at Japanese car companies), you'd think they could be a little less idiotic.

So, yes, idiots are in charge, so the hard working employees of company end up suffering. Factory workers lose their homes and blame Japan for their own company's stupid decisions.

Toyota didn't force GM, Ford and Chrysler bet the farm on fuel hogs (again!). I'm tired of the excuses. Until they wake up and smell the coffee on this, they deserve what they get.

That's my opinion from a few decades of direct observation, anyway.