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POLI 243 (112)
Mark Brawley (109)

Japan's monetary policy

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Political Science
POLI 243
Mark Brawley

Japan and International Monetary Cooperation The Plaza and Louvre Accords 03/04/2013 12:35:00 ← Conflict between the US and Japan • Historically the yen had been undervalued o US encouraged them to undervalue currency to be more successful at exporting goods/not buying goods from US o Japan and West Germany fix a low exchange rate: built-in competitive edge in trade • As with South Korea, this boosted exports o Industries become more successful, majority of trade • “Nixon Shocks” 1971 – led to inflation o US could handle it in 50s/60s, but not later on o Stopping Bretton Woods: fixed exchange rates, no promises o Oil shock due to OPEC embargo – increased cost of transportation; lost confidence in money with no backing, invest in assets (gold, art) • US (Federal Reserve) monetary policy shifted in the late 1970s o Find new balance between confidence and liquidity o Manipulate domestic interest rate – tight money supply  Higher interest rate to borrow money – less purchases, slowed economy  Convince people that inflation is over = long-term policy o Loose fiscal policy to stimulate economic growth (Reagen)  Government spends money, borrows at high interest which increases debt • The higher dollar damaged American trade o Value of the dollar rises over other currencies o American firms cannot sell goods at such expensive value o Advantage for other countries – their goods look cheap in US  Japanese goods come into the market, outsell US goods • As trade deficit rose, Japan became focal point o Japan made manufactured goods that were just as good • Demands within the US for action grew stronger in the mid-1980s – but using which policy? o Automobile manufactures, labor unions visit Congress o Monetary policy? Industry specific trade policies?  Trade policy helps certain people specifically, but monetary policy affects everyone • US preferred change in monetary policy over trade conflict o Government doesn’t want to engage Japan at that time o Uruguay rounds for GATT need to be successful o Want to threaten Japan: Congress vs Executive ← ← American Actions • “Talking the dollar down” to a “soft landing” o Successfully ended inflation how to restart economy o Easing up on interest rate means the value of the dollar drops o Let the dollar drop in value, but only a little, and warning people. Easing it down, gradually.  Exchange rate decrease will solve trade problems • Was this a ploy, or genuine bureaucratic struggle (Federal Reserve versus Treasury) o FR – slow decrease of exchange rate in interest of the nation o Treasury – owe allegiance to President, needs economy to recover, want accelerated money flow o Bureaucratic politics – different responsibilities (elected versus nation interest) o Both agree for the need of the soft landing – trying to fine- tune the interest of the public • Result: coordinated exchange rate interventions, under floating exchange rates o Japan brought currency down to US level to keep advantage o US push market in one direction, Japan goes the other way o Work with other country governments to help each other’s policies – but no institutional setting • Ad hoc management of policies o Creating meeting to discuss coordination of policies • Desire to get economic recovery underway too o Exchange rate + stimulation of economies ← ← The Accords • The Plaza Accord: Sept 1985 • Finance ministers from the G5: US, Japan, Britain, West Germany, France (main economies of IMF) • Coordination of domestic policies needed • Japan and West Germany don’t need stimulus package  different problems then the US • The Louvre Accord: February 1987 • G5 plus Canada are involved • Coordinating exchange rates to drop US dollar value, rise in other values versus the dollar, helping all economies • Japan agrees to rise in yen’s value, plus promises to increase domestic spending o Pressure from US (systemic)? Action of Finance Ministry but who makes the decision? Domestic interest? ← Explain
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