Toyota and the Yen

Amidst continued struggles for the Big Three U.S. automakers, last week Toyota announced a 7.3 percent rise in 3rd quarter net income. Various political and media accounts suggested that the Japanese automaker's strong earnings were for reasons other than it fulfilling the needs of consumers.

Currency manipulation was most frequently cited as the secret to its success, with Michigan Representative Sander Levin telling the Financial Times, "Japan is clearly following policies to maintain a weak yen." Aside from the fact that the yen has fallen only 1.5 percent against the dollar over the past year, misunderstanding and misinformation abound when it comes to currencies and trade.

To begin, all central banks thankfully manipulate the value of the money they issue. To do otherwise, for central banks to practice "benign neglect," would be tantamount to doing nothing if the currency they manage were in freefall, or, conversely, ascending in value. Be it inflation or deflation, changes in currency value retard the all important debtor/creditor relationship so essential to commerce, plus investment slows as economic actors retreat from unstable currency regimes.

On the cross-border trade front, the slightly weaker yen has unsurprisingly generated lots of commentary about trade deficits, and fear that Japan is exporting too much. The Financial Times reported that at 16 percent, Japanese exports as a percentage of GDP had "surpassed the levels of 1985." 1985 is particularly notable considering it was in September of that year that Japan agreed to revalue the yen upward as part of the Plaza Accord. Then as now, Japanese companies were apparently giving U.S. consumers too much of what they wanted at a good price.

Since '85 the yen has risen over 45 percent versus the dollar, and despite the currency strength that the U.S. demanded as a way to curb imports, Japanese companies continue to successfully sell their wares in U.S. markets. Japan's trade surplus with the United States reached a twenty-year high last May, and even though Adam Smith taught us that trade deficits are a sign of strength, certain U.S. companies and their enabling political benefactors are seeking an even stronger yen under the delusion that this will weaken their Japanese competitors.

Fortunately for U.S. consumers, changes in currency value do not change the real value of the goods in which they're priced. As opposed to trading currencies, acquisitive individuals and companies trade goods they have in surplus for goods they lack. All trade is in the end barter, with money merely serving as a lubricant for this process. As such, wealth-enhancing trade happens most when currencies are stable. Their relative value, as evidenced by Japan's success despite long-term yen strength, is irrelevant.

Returning to Toyota, to assume that it profits when the value of the yen falls is to say that markets and its own executives are fooled by income gains that are altogether illusory. Luckily, the folly of this logic is pretty easy to spot. Any sales gain achieved by a weaker yen would by definition be erased by the yen's own weakness. Furthermore, a devalued yen would drive up Toyota's labor costs, the costs of parts necessary to build its cars, and the prevailing world shipping rates that would necessarily rise as the yen weakened.

Reversing this concept, let's assume that in trying to stimulate the export of U.S. autos, the U.S. devalued a dollar that presently buys 120 yen to one that would only buy 60. Would U.S. car companies sit by idly and sell their cars at half the price? Would their employees and suppliers similarly accept a 50 percent cut in pay?

That they wouldn't lays bare the bankrupt nature of the devaluationist mindset. Even if the latter could drive sales, money is in the end paper backed by an implicit promise of the government that issues it. Firms in devaluing countries might see an increase in their nominal earnings, but the real value of those extra earnings would be reduced by the aforementioned devaluation.

The money illusion has sadly captivated economists, politicians and producers for centuries. Despite its continued prevalence, individuals and companies will continue to trade products for products. Jawboning countries like Japan won't change this, though it might succeed in starting a trade war that will make us all worse off.