Global Imbalance and China Revisited:
Yen and Yuan; Another Plaza Accord

by Kazuo Yamazaki

[December 1, 2006]


In this presentation, I will accurately and visually reveal how exactly Japan's economy has come to a condition it is in today. That is, as we all know, the "Lost Decade of Deflationary Trap."

Most of us are not aware that the country that has recorded the lowest real GDP growth in the last decade is not some Sub-Saharan or South Asian country; it is Japan. Most of us, if interested in this subject, believe that the New York Plaza Accord in 1985 that resulted in the Japanese Yen appreciation relative to the rest of the world's currencies, especially the USD, deserves the complete responsibility for the fall of the Japanese economy.

The reality is far worse and hardly that simple.

The tragic events such as Nixon Shock, the Oil Crises in 1970s and Black Monday in 1987 put the Bank of Japan in a hard position. As the Japanese Yen continued to appreciate against the USD post-New York Plaza Accord, the official discount rate in Japan was reduced five times: the second and third decided simultaneously with the US, the fourth along with a joint statement between the Japanese Finance Minister Miyazawa and the US Treasury Secretary Baker, and the fifth on the same day the Louvre Accord was announced. Orchestrated?

Just when the Bank of Japan was ready to start raising the rate, the US President Reagan met the Japanese Prime Minister Nakasone in May 1987 and the Prime Minister Takeshita in January 1988 to pressure the Bank of Japan to refrain itself from raising the rate. In the late 1980s as the asset bubble in both stock and land prices started to balloon to an unsustainable size, the Bank of Japan Governors could only sit back and watch until it burst in 1990 and 1991 respectively. The rest is history.

A similar situation is seen today in China. The Chinese currency RMB is de facto pegged to the USD, its economy is overly dependent on the trade sector, the real estate market in main cities such as Shanghai and Beijing has been on fire, and the pressure to appreciate RMB from the US side has been mounting.

Should China resist the appreciation of RMB against the USD? Absolutely not. That is not the lesson to be learned from the experience of Japan. China should speed up the appreciation of RMB, post-pone the liberalization of its capital account until its financial sector is ready, and monetary policy rate should be conducted targeting its domestic price stability, not foreign exchange rate.

Come and be enlightened. Witness how the world's second biggest economy has been completely shattered into pieces, so bad that it is still unable to recover after almost two decades of effort such as the Zero-Interest-Rate-Policy and Quantitative Easing. Join the discussion of how the New Super Power China can avoid the same mistake.






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