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Japan Forfeits 30 Years to the Gyrations of the Yen

Tsuchiya Hideo [Profile]


Japan’s Lost Decades Began in 1985

What was once called Japan’s lost decade has now persisted for much longer than 10 years. Despite hopes that the policies of Abenomics would generate a virtuous circle of recovery, turmoil overtook the world economy before they could do so. The yen appreciated, stock prices fell, and it does not seem likely that the negative interest rate of the Bank of Japan will resuscitate the economy.

Japan’s lost decade is usually thought to have begun in 1991, when a land-price bubble collapsed. It would be better, however, to count the lost years from 1985, when the speculative bubble began to inflate. Without the bubble, there would have been no collapse or the aftereffect of long-term stagnation. The country has already forfeited three decades.

Japan became the world’s top exporter of industrial products in 1985. The limits of export-led growth were, however, already becoming apparent, as exemplified by mounting trade friction between Japan and the United States. The Plaza Accord that unleashed the unprecedented appreciation of the yen also took place in 1985. This is when Japan’s economy began its years of wandering at the mercy of a gyrating yen.

The Catalyst: The Plaza Accord

The research of Harvard University Professor Dale Jorgenson and others discloses that the yen was consistently undervalued against the dollar prior to the Plaza Accord in terms of purchasing power parity. A yen that was estimated to be undervalued by 13% in 1985 became overvalued by 28% in 1990 and by 75% at its peak in 1995.

In the first half of the 1980s, the forceful tightening of monetary policy by US Federal Reserve Chairman Paul Volcker to rid the economy of inflation led to high interest rates and a strong dollar in the United States. On September 22, 1985, the finance ministers and central bank governors of Japan, the United States, Britain, Germany, and France gathered at the Plaza Hotel facing Central Park in New York City, where they agreed to coordinated intervention in foreign exchange markets to correct the strong dollar by increasing the value of nondollar currencies. Minister of Finance Takeshita Noboru and Bank of Japan Governor Sumita Satoshi participated from Japan.

At the time of the accord, $1 traded for about ¥240. The intention of Takeshita and others was to let the yen appreciate to about ¥200/$1, but the yen did not stop there. At the start of 1987, the yen fell below ¥150/$1. The Louvre Accord of February 1987 to halt the depreciation of the dollar failed to do so, and the yen strengthened to ¥120/$1 by the start of 1988. Intervention by currency authorities to sell dollars for yen had no effect. In just three years’ time, the dollar’s value had fallen by half.

Japan’s exporting industries cried out in agony. To respond to the slump induced by the strong yen, the government and the Bank of Japan sought to promote domestic demand. The BOJ reduced the official discount rate five times in 1986 and 1987. The government reversed austere fiscal policies and expanded public works spending.

While the economy began to recover toward the end of 1986, Japan erred by overreacting to Black Monday, when US stock prices collapsed on October 19, 1987. The BOJ hesitated to reverse an accommodative monetary policy from concern about its adverse impact on the world economy. The official discount rate remained at an all-time low of 2.5% for two years and three months, and banks’ aggressive lending to companies fueled the rise of land and stock prices.

The Massive Failure of Investments

Thomas Piketty’s Capital in the Twenty-First Century includes a chart that can be understood at a single glance. It is a graph that depicts the ratio of private-sector capital to national income for advanced economies. Japan’s ratio forms an extraordinary spike, shooting up from under 500% in 1985 to about 700% in 1990. Piketty indicates that the largest bubble to inflate between 1970 and 2010 was without question Japan’s bubble of 1990.

What the bubble represented was the massive failure of investments. The act of investing is one where a desirable future is imagined and where resources are invested toward its realization. Japan, however, had no sure vision of the future at that time. Rather, the nation simply chased after the lead runners of Europe and the United States for many years in an economic marathon.

It was 1979 when Ezra Vogel published Japan as Number One. As inflation and stagnation beset advanced economies in the aftermath of the oil crises earlier in the 1970s, Japan was the first to escape this mire thanks to the success of the manufacturing sector in dramatically reducing the energy intensity of production.

Now that Japan had advanced to the head of the pack, though, there was no one left to guide it forward. In his 1985 Chika kakumei (translated as The Knowledge-Value Revolution), the economist and author Sakaiya Taichi argued that Japan should transition from an industrial society of standardized mass production to a knowledge-intensive society where the value of knowledge reigns supreme. Had this route been chosen, a Silicon Valley might have sprung up in Japan.

What actually transpired was a land-price revolution where real estate prices surged upward. Excess liquidity encouraged many companies to engage in financial engineering, to invest in real estate, and to develop resorts and channel large investments into their core businesses. With the collapse of the speculative bubble, what came to be known as the three excesses—excess fixed assets, excess employment, and excess debt—fettered Japanese companies for a long time.

  • [2016.04.14]

Journalist. Born in Wakayama in 1948. Graduated from Sophia University with a degree in economics. Worked as columnist and senior feature writer at Nikkei and served on the paper’s editorial board. His works include 1971 nen shijōka to nettoka no kigen (1971, the Era of Commercialization and Rise of the Internet). Member of the editorial board.

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