In a surprise move, the US Treasury department issued a strong warning for their counterparts in Japan – holding them solely responsible for currency manipulation throughout 2011.  The announcement – garnered through the semiannual release of the US department’s report on foreign exchange – reprimanded the world’s third largest economy on its efforts to dampen the effects of speculation on its currency in both August and October of this year.  More recently in October, Japanese officials were said to have spent almost $116 billion in protecting the yen from breaching record highs set this year – at around 75.57.  The report went on to further detail and press Japanese officials in taking “fundamental and thoroughgoing steps to increase the dynamism of the domestic economy.”

However, the report fell short when it failed to claim that China was a major currency manipulator in its own right.  Although recognizing that the Chinese currency – the yuan – was severely undervalued compared to other trade partners, the US Treasury disregarded the title of currency manipulator – as well as issuing any harsh language against Beijing for its almost daily intervention in keeping the currency under control.  The report continued to make note that US officials remain committed to pushing Beijing in opting for greater exchange rate flexibility and making efforts in diversifying China away from export focused growth.

Although the Treasury department comments are likely to keep Japanese officials from readily pulling the trigger on future short term interventions, it is not likely to keep them from searching for other ways to weed out short term yen speculators.  In the last two days, Japan’s government has expanded swap lines and created a deeper two way exchange with major trade partners, that could be used to lessen the demand for the country’s currency <read alerts here>.

Following the report, Japanese officials reiterated their commitment to defending current monetary and currency measures stating that “there is no change in our stance that we will respond to excessive rises in the yen”.