Analysts said Mr Paulson’s comment to US lawmakers on Wednesday that he was “watching the Japanese currency very, very carefully” and will talk to his Japanese counterpart next week should not be seen as a signal of unhappiness at Tokyo.
But it did appear aimed at dampening down European efforts to push discussion of the relative value of the euro and Japanese yen higher on the agenda of an approaching February 9-10 meeting in Essen, Germany, of Group of Seven finance ministers.
“I think that what he was doing was saying that he was going to work very hard to keep any reference to the yen’s value well outside any G7 communique,” said currency strategist Lara Rhame of Credit Suisse First Boston.
The G7 has four European countries, Germany, Italy, France and Britain, as well as the United States, Canada and Japan as members. Europe has become unhappy as the yen hit record lows against the euro and pinched European exports.
While German Finance Minister Peer Steinbrueck, who will chair the Essen meetings, has said the euro/yen rate is a topic for the talks, Mr Paulson seemed to slap down any hope that the United States would support any bid to talk up the yen.
“I don’t like verbal intervention, I don’t think it determines where markets trade,” Mr Paulson told the Senate Banking Committee.
On Thursday, Paulson further clarified his position when asked during a Bloomberg Televison interview whether it was accurate to say that he had no immediate concerns about the yen’s value.
“I think that’s fair,” he replied.
In fact, Treasury officials on background routinely debunk the usefulness of deliberate currency intervention, partly on the basis that money flows now are so large that lasting changes can’t be engineered and because emerging economies like China’s play an ever-growing role in the global economy.
Official interest rates vary from 0.25% in Japan, to 3.5% in Europe and 5.25% in the United States. Wide differences in these regional official interest rates irritates Europe and makes it harder to draw investors’ funds to Japan to drive up the yen’s value.
But Mr Paulson said Japan has experienced weak growth and is just coming out of deflation, so interest rates are low “and I think it’s those economic fundamentals that are driving it” effectively putting the US’s weight behind Japan.
Adam Posen, an economist with the Petersen Institute of International Economics, said it seemed evident that Tokyo “is counting on Paulson to block any serious effort at dealing with the yen’s value in Essen”.
But he also noted that Japan’s economy has performed fairly soundly for some years now, growing at rates of 1.8%, 2.3%, 2.6% and a forecast 2.7%, respectively, from 2003 through 2006, according to statistics compiled by the International Monetary Fund.
The chairman of the House of Representatives’ Energy and Commerce Committee, John Dingell, complained in a letter to Mr Paulson that Japan “has intentionally weakened the value of the yen to support its exports”.
Mr Dingell, with Japan clearly in his sights, demanded answers by March 1 on how Treasury defines currency manipulation.