Japan walking into a trap at Essen?

The G7 is due to meet in Essen, Germany this weekend, and there are dark rumblings that Japan may be called to account for failing to allow its currency to rise as the dollar falls, which has forced the euro to appreciate to a greater extent than the yen, which has remained the weakest of the major currencies.

At a recent ECOFIN (that’s the Economic and Financial Council of the Council of the European Union — the finance ministers’ group in the European presidency) meeting, German Finance Minister Peer Steinbrück and French Minister of Economy, Finance and Industry Thierry Breton suggested that the weakness of the yen would be on the table at Essen. In Breton’s words, “We agreed that the yen ought to reflect the reality of the Japanese economy” (From Jiji, in Japanese).

That was from 31 January.

Just before that, however, US Undersecretary of the Treasury for International Affairs Tim Adams said at Davos that the US viewed Japan’s economic policy as “appropriate,” suggesting that any attempt by the European members of the G7 to cajole Japan into allowing the yen to bear more of the burden of the dollar’s fall would be nixed by the US.

Recent changes in the US, however, suggest that Japan may in fact be confronted in Germany.

First, Adams tendered his resignation on Friday. His letter gives the usual “more time with my family” excuse, but I can’t help but wonder if there isn’t a dispute going on in the upper reaches of the Treasury Department over how the US should deal with currency manipulation. As Ken Worsley notes in this post at his Japan Economy News blog, Congressman John Dingell (D-MI), chairman of the House Energy and Commerce Committee, apparently wrote a letter to Bush calling for the administration to press Japan on the currency issue. (Apparently if China won’t budge, Congress can always turn to Japan as a scapegoat.) Maybe Secretary Paulson is caving on this front.

Second, I wonder how the Kyuma dispute plays into all this. The Bush administration, after all, isn’t known for being especially charitable to critics, and Kyuma trod upon the administration’s toes — well, toe, probably the pinky toe — just as it struggled to sell the new course in Iraq to the American public. While alliance managers have traditionally tried and mostly succeeded at keeping the economic and security realms separate, I can’t help but wonder if the Bush administration, embattled at home and abroad and short on prominent Japan hands, isn’t particularly concerned about breaking with tradition in the US-Japan relationship.

As such, should Japan face a united front of criticism from the rest of the G7 in Essen, it could be a crippling blow for the already tottering Abe Cabinet. Combined with the boycott of budget hearings by the opposition as a result of l’affaire Yanigasawa, pressure from the G7 to change course at home could further paint Abe into a corner.

Is it too early to start placing bets on how many more months (weeks?) Abe has before being ousted?

One thought on “Japan walking into a trap at Essen?

  1. Dingell\’s clearly a rabid protectionist, and the only solid claim he could make (which he has yet to actually make), would be that Japan boosted its imports to the US by 37% in 2006 despite claiming that it was going to produce more units in North America.I just don\’t see this getting anywhere on the G7 agenda, especially now that the Treasury has said that Japan hasn\’t intervened (directly) in FX markets since the Jan-March 2004 period. Maybe Watanabe will turn out to be right.


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