Last updated at: (Beijing Time) Thursday, September 25, 2003

Revaluation of Japanese Yen, a historical lesson to draw: analysis

Recently some Japanese politicians have been busily engaged in activities here and there, with an intention to reach an agreement similar to the 1985 "Plaza Agreement", which resulted in forcing the Japanese yen to revalue, in order likewise to corner the Renminbi (RMB) yuan to revalue now.


Recently some Japanese politicians have been busily engaged in activities here and there, with an intention to reach an agreement similar to the 1985 "Plaza Agreement", which resulted in forcing the Japanese yen to revalue, in order likewise to corner the Renminbi (RMB) yuan to revalue now. However, we must ask, under what backdrop, and through whose hands the 1985 "Plaza Agreement" was reached? What did the forced revaluation of the yen bring to Japan? And why the Japanese government stuck tenaciously to its "low yen" policy, for which it has never hesitated to hurt its neighbors?

The US forced Japanese yen to revalue
After the collapse of the Bretton Woods system in the 1970s, Japan began to adopt the managed floating exchange rates. By September 1985, when the "Plaza Agreement" was signed, the rates of yen against US dollars had risen from its original fixed lowest point 360:1 to 240: 1. But the big rise didn't satisfy the American government, as it believed that it was just the extremely low value of yen, which strengthened the competitiveness of Japanese products against the Americans and resulted in the huge trade deficit of America to Japan. The deficit, having appeared in the middle of the 1960s, had expanded and reached 33.08 billion US dollars by 1984, a figure 1.23 times that of America's export volume to Japan.

Intending to solve the problem of "twin deficits" (financial deficit and trade deficit), the Reagan Administration in the second terms of office discussed the adjustment of current exchange rates by entrusting its finance minister Baker to call a meeting of G-5 finance ministers (France, West Germany, Japan, the UK and US). The meeting was held on September 22, 1985 at the Plaza Hotel of New York, at which the "Plaza Agreement" was signed with the US taking the lead. Its content at the kernel was, through common interference in foreign currency markets, to force the currencies of the other four countries, especially the Japanese yen and German mark, to revalue.

Under US pressure, the Japanese government and banks "honestly" carried out the "Plaza Agreement", starting to interfere the yen exchange market on a large scale together with the US. As a result the exchange rate of yen against US dollars skyrocketed, exceeding 200:1 by the end of 1985, going beyond 150:1 at the beginning of 1987 and nearing 120:1 in early 1988. This means that the Japanese yen had doubled its value against US dollars in less than two years and a half!

From yen revaluation depression to economic recession
We all know that the rapid growth of Japanese economy after the WWII was to a large extent driven by its fast expanding foreign trade based largely on the low exchange rate of yen. Therefore, the sharp yen revaluation enforced by the "Plaza Agreement" hit badly and directly the country's foreign trade, throwing readily Japan's economy, which depended heavily on foreign resources, into a "yen revaluation depression", (that is, depression brought about by the yen revaluation). In 1986, Japan saw its total export volume shrank by 15.4 percent, real GDP growth dropped by 1 percentage point; the industrial and mining production index decreased by 0.2 percentage point and the unemployment rate broke the highest record after the war.

To shake off the depression the Japanese government and banks adopted a series of stern policies and measures. One of them was the unprecedented "financial relaxation" policy, in which Japanese banks cut interest rate for five successive times and finally fixed it at the extremely low level of 2.5 percent. Under the prevailing financial liberalization and reduced capital demand for entity economy, the large amounts of abundant funds instigated by the extremely-low interest rate swarmed to stock and real estate markets, resulting in sharp expansion of economic bubbles with stock and land prices to soar up at the core. By the end of 1989 the Nikkei average stock price had climbed to 389,000 yen, expanding two times in four years! While during 1998 alone the land price around Japan's three major metropolitans rose by 43.8 percent, the Tokyo Rim rising even by 65.3 percent.

In early 1990s, the economic bubbles created by the yen revaluation suddenly blew up, plunging the nation into an unprecedented recession, from which the country has been trying to struggle out till today. During the recession lasting longer than a decade, almost all the important economic indexes registered the worst post-war record. By then Japan had completely lost its long-term advantageous position held in the after-war pattern of western economic growth, especially that over the US. To some degree we should say, after years of efforts as set out at the "Plaza Agreement", America finally has defeated its biggest rival in the field of international trade.

Japanese government sticks to "low yen" policy
The forced yen revaluation, which at first brought depression, then recession with blown up bubbles, is a bitter pill for Japan to taste. Upon deep reflection of the lesson, Japan has been deepening taking "low yen" policy as the guidance of the nation's exchange rate policy, even trying to make it the core of its whole foreign policy and macro-control system. For those defenses Japan would not hesitate to harm other nations' interests when inducing yen devaluation and preventing its revaluation. A typical example happened before and after the 1997 Asian financial crisis, when the exchange rate of yen against dollars, under official influence and manipulation, dropped sharply from 79:1 of 1995 to 147:1 in 1998, directly triggering and worsening the crisis. Currently the main official means of Japan to prevent yen revaluation is to put large amounts of yen into foreign currency market and buy in US dollars. According to the latest statistics released by the Ministry of Finance, during the last seven months Japan had officially put in more than 9 trillion yen into exchange market, refreshing its historical record of 7.6 trillion yen in 1999, in an effort to keep the rate against dollars below 115:1, a bottom-line acceptable to Japanese enterprises.

What is more important is that, as a key link of the "low yen" strategy, related departments of the Japanese government even went so far as to force RMB yuan to revalue. When G-7 finance ministers and central bank presidents met in last February, Japan tried to pass an agreement similar with the "Plaza Agreement" to force RMB to revalue. After that, at the Asia Europe Economic Ministers' Meeting in last July Japan declared that the excessive low exchange rate of RMB was "the main reason of global deflation", and tried to be hand in glove with the US to force RMB to revalue. But the question is, even if the yuan yields under pressure and China's economy is badly hit as was the Japan's, it is quite unlikely that Japan could get the benefits it has been seeking for.

This is an article on the seventh page of People's Daily, September 23, by Pro. Jiang Ruiping, Chairman of the Department of International Economics, Foreign Affairs College, Beijing; translated by PD Online staff member Li Heng.

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