DECEMBER 28, 2011
U.S. Criticizes Japan, China on Currencies
By TOM BARKLEY And SUDEEP REDDY
The Obama administration again declined to label China a currency manipulator, while it criticized Japan's efforts to limit the yen's appreciation.
The Treasury Department, in its overdue semiannual currency report, offered its most direct criticism to date of Japan's two latest currency interventions, which the U.S. didn't support. The move could complicate any further attempts by Tokyo to intervene in currency markets.
Treasury also said in the report, released Tuesday, that it would continue to press Beijing for greater exchange-rate flexibility, as well as to level the playing field for foreign companies and to shift China's economy away from export-led growth.
In the report, the department said that "While China's real exchange rate has appreciated, the process of appreciation remains incomplete." The report noted that the yuan has appreciated nearly 12% against the U.S. dollar on an inflation-adjusted basis since June 2010.
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"China's longstanding pattern of reserve accumulation, the persistence of its current-account surplus and the incomplete appreciation, especially given rapid productivity growth in the traded-goods sector, indicate that the real exchange rate of the renminbi is persistently misaligned and remains substantially undervalued," the report said.
The latest report, which will likely further inflame China critics in Congress, was released while lawmakers were away for the holidays.
Officials at the Chinese Embassy in Washington weren't immediately available to comment.
On Japan, the Treasury report noted that "rather than reacting to domestic 'strong yen' concerns by intervening to try to influence the exchange rate, Japan should take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy, increase the competitiveness of Japanese firms—including those in utilities and services—and raise potential growth."
The U.S. and other Group of Seven nations joined Japan in a yen intervention after the March 11 earthquake. But the U.S. declined to back Japan's two latest moves, saying the currency should be based on market fundamentals.
Market participants in Japan said early Wednesday that they were surprised by the strong language used in the Treasury report and predicted that it would make it more difficult for Tokyo to again enter the market to try to weaken the yen.
"We knew that the U.S. has not welcomed Japan's recent interventions, but this clear a message was quite a surprise," said Junya Tanase, chief currency strategist at J.P. Morgan in Tokyo.
A Japanese government official said in reaction to the report that there would be "no changes" in the nation's foreign-exchange policy, adding that Japan will continue to explain Japan's foreign exchange policy to other governments.
Japan has repeatedly said it would intervene to stop what it termed excess volatility and has said the yen's strength near postwar highs against the dollar wasn't warranted by the fundamentals of the Japanese economy.
The U.S., as expected, opted not to name China a currency manipulator though it called the yuan appreciation "insufficient." Designating China as a "currency manipulator" would be a significant ratcheting-up of public pressure on Beijing, but in practical terms would do little besides trigger new talks between the U.S. and China on its currency.
In October, Treasury had said it would delay the currency report, in the hopes of using global summits as leverage to persuade China to let the yuan appreciate more quickly.
It is clear the Obama administration is aware that the pace of yuan appreciation will slow next year: Economists in China have widely forecast that will happen because of slowing export growth.
In 2012, China is expected to have a current-account surplus under the 4% mark that U.S. Treasury Secretary Tim Geithner tried—and failed—to make a standard for Group of 20 review at the G-20 summit in November 2010. But the administration's hands are tied politically, given the important role China is playing in the presidential campaign.
Substantively, the White House is likely to argue that Beijing should continue with a more rapid pace of appreciation because that will help China make the transition to domestically led growth. But the real question is whether the Chinese will plan for any appreciation in the yuan at all.
—Jeff Bater and Bob Davis contributed to this article.