Dollar Diplomacy and Japan’s Lost Decades

American pressure on the Chinese authorities over their currency policy is reminiscent of US pressure on Japan to revalue the yen in the second half of the 1980’s and the first half of the 1990’s. But, while the Chinese believe that currency appreciation caused Japan's long-term deflation and stagnation, they may be misinterpreting what happened.

TOKYO – A specter is haunting China’s exchange-rate regime: the long-running dispute between the United States and Japan throughout the 1980’s and early 1990’s over the value of the yen. That dispute ended only when Japan’s economy entered its “lost decades,” which has made the Chinese determined not to repeat the experience.

Of course, history – particularly financial history – never repeats itself exactly. But the arguments being heard about the renminbi today certainly give rise, at least for Japanese, to a strong sense of déjà vu.

Now, as then, the United States Congress is the focal point of American anger. Today, it is preparing retaliatory legislation against China in response to pressure from many in the US who argue that an artificially weak renminbi is contributing to global imbalances, in particular to America’s massive bilateral trade deficit. They are also frustrated that the US Treasury has not “named and shamed” China by designating it a currency manipulator.

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