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Dollar Diplomacy and Japan’s Lost Decades

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.

But, based on Japan’s experience, the Chinese do seem to have good reasons to be wary of US pressure to revalue the renminbi. Indeed, the economists Ronald McKinnon and Kenichi Ohno have singled out US pressure for yen appreciation as a key source of the Japanese economy’s long-term deflation and stagnation – the so-called “lost decade” of economic malaise that is now well into its second.