When President Obama and Japanese Prime Minister Abe meet on Friday, currency manipulation and Japan’s unfair trade policies must be addressed. The Yen has declined 13% in the past three months, in part because Mr. Abe has pledged to weaken monetary policy to spur growth. A weaker Yen lowers the cost of Japanese imports in the U.S. and raises the cost of U.S. exports in Japan and other countries where our products compete. While a more expansionary domestic monetary policy is an appropriate tool for a country stuck far below economic potential because of demand shortfalls, Japan has also displayed a historic pattern of intentionally lowering the value of their own currency vis-à-vis the U.S. dollar by buying U.S. denominated assets. Because the first-order effect of this direct currency manipulation is to create demand for Japan at the expense of the U.S., which is also currently starved of demand, this is not responsible policy for a country as large and important in global trade markets as Japan.

Currency manipulation is the single most important cause of growing U.S. trade deficits and Japan has a well established reputation as a currency manipulator. Japan has expressed a desire to join the proposed Trans-Pacific Partnership (TPP), a regional free-trade agreement with 10 other countries.  The TPP should include language to end currency manipulation by Japan and other trading partners.  Elimination of currency manipulation by China, Japan and other countries could create 2.2 to 4.7 million jobs, expand U.S. GDP and reduce the federal deficit, according to a recent EPI report.

The U.S. trade deficit with Japan increased from $66.4 billion in 2011 to $79.9 billion in 2012, an increase of $13.4 billion (20.2 percent).¹ Growing trade deficits lead to job losses and growing unemployment or weaker growth in the United States. Exports support demand for domestically produced goods, so growth in exports increases employment. However, rising imports reduces demand for domestically produced goods, which reduces domestic employment. Thus, growing trade deficits have cost jobs and been a drag on the U.S. recovery.

Japan remains one of the most closed markets to U.S. exports despite more than twenty years of trade negotiations and market opening initiatives designed to end Japan’s unfair trade practices. Informal business practices, as typified by the interlocking relationships between banks and corporations in the Japanese Keiretsu system, serve as an impenetrable barrier to foreign imports in many markets, no matter how competitive foreign goods or suppliers may be. Highly imbalanced trade is the natural result of this system. The automotive market is one of the most closed sectors in Japan. Japanese exports of autos and parts to the United States exceeded U.S. exports to Japan by a ratio of 5.7 to one in 2012. Overall, total Japanese exports to the United States exceeded bilateral imports by a ratio of 2.2 to one in 2012.

U.S. trade with Canada, a well-developed neighbor, is much more balanced. The United States had a similar, $79.7 billion trade deficit with Canada in 2012, but the ratio of imports to exports in bilateral trade was only 1.3 to one. Canada is much more open to trade with the United States than Japan.

Despite the rhetoric, signing more free trade deals is a terrible way to create jobs. The U.S. has experienced growing trade deficits and job losses after signing FTAs with Mexico, Canada, Korea and other countries. The model needs to be fixed and the best place to start is by ending currency manipulation now, and by making sure that any new FTAs include language that prohibits countries from currency manipulation in the future.

1. All trade data in this post refers to domestic exports of goods produced in the United States (ignoring transshipments or re-exports of goods from other countries), and imports for consumption, as reported by the U.S. International Trade Commission, Trade DataWeb.