POLI 243 Lecture
Japan and int’l monetary cooperation: explaining the policy debate
Explaining Japan’s situation
⋅ The system-level:
o Japan’s post-war economic strategy: successful at growing its economy &
industrializing by focusing on exports, encouraged by US. Undervalued exchange
rate (also encouraged by US) helped with this strategy. Japan benefitted from
access to American market.
o But by 1980s trade balance with the US causing friction: trade imbalance with
US; US is struggling with economic recession due to very high interest rates
meant to boost the dollar.
o Potential yen-dollar rivalry, if yen rose too high: yen previously undervalued for
trade purposes, but Japan didn’t want yen to become int’l medium of exchange,
because that would upset advantage in trade and the benefits weren’t clear. Japan
didn’t want yen to rise in value and challenge US in that capacity.
⋅ The domestic-level:
o Decades of export-oriented growth: exports were key driver of economy, thus
exporting sectors were the strongest.
o Predictable distribution of domestic interests:
Caveat: exporters are very powerful in urban manufacturing areas.
However, key feature of Japan post-WWII is overrepresentation of
agricultural/rural interests (like in Japanese parliament). Those interests
o These sectors (exporters) vulnerable to US trade sanctions: exporters recognize
dissatisfaction within US and know that trade policy or monetary policy could be
o Japanese gov’t therefore preferred action on monetary policy: listening to
domestic interests in Japan, gov’t preferred not to make concessions on trade.
Don’t want to open up agriculture (rural voters) or see tariffs against exporters.
Best choice was monetary policy – would allow them to spread impact over many
exporters, but impact has unclear time period and would be a lesser blow to all.
⋅ Impact of decisions made:
o Initially, Japanese leaders compromise: Americans pushing Japan to let yen rise
in value (remember that US is trying to push dollar down) – Plaza Accords – how
to coordinate exchange market.
o Target rate for yen set at 210 to $1 (rate at time of negotiations was 242 to $1)
o Overshot: in February 1986 the rate hit 200 yen to $1: a reflection of the fact that
not only did gov’ts agree on a rate, but also, markets also expected the yen to rise.
⋅ Bureaucratic politics or individual level?
o Bank of Japan’s preferences: Japan, unlike US & Federal Reserve, has the Bank
of Japan answering to the Ministry of Finance (not politically independent).
o Ministry of Finance’s preferences:
Two concerns (for typical Ministries of Finance):
1 POLI 243 Lecture
• Gov’t budget, debt interest rates.
• Minister is in Cabinet, usually from ruling party – elected official
worried about competitiveness of own party.
o Cabinet tells Ministry what to do: here, we can’t rely on “usual story of