POLI 243 Lecture Notes - Lecture 22: Japanese Yen, Money Supply, General Agreement On Tariffs And Trade

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Japan and Intl Monetary Cooperation in the 1980s: The Plaza
and Louvre Accords
April 4, 2016
Origins of the Policy Conflict between the US and Japan
Bretton Woods Era: Yen undervalued
o Parallels West Germany
o Tied to the US dollar
o Gave competitive advantage to other countries (US) in the 50s
Bretton Woods gave other countries an edge in trade
US not worried about other currencies being a rival to the US dollar
Issue of recovery from WWII: BW makes the price of foreign goods look
cheaper and more attractive to buy
o Boosted Japanese +West German exports
Moves to more sophisticated products
o Most Japanese goods were competitive due to price (commodities, low tech
industrial goods, textiles successful exporters become an important lobby in
o 70s: mix in export products more sophisticated items sold with undervalued
Nixon Shocks in 1971 breaks dollar's link to gold, accelerates domestic issues in the US
o Inflation in US accelerates less confidence, high liquidity, less incentive to save
(movement from US currency to the DM)
o Yen not available in intl markets don't suffer as much as West Germany with
people leaving the US dollar to invest money in yens
o Investors buy items they think will increase in value as opposed to stocks and
bonds (gold, artwork)
American Policies to deal with inflation
Downside: alter domestic monetary policy
o Keynsianism is not working in the US
o High unemployment deal with inflation vs unemployment, no right solution
Deal with inflation by raising interest rates: raises unemployment, but
does not improve inflation much
Deal with unemployment (govt spending, lower interest rates): pushes
inflation rates up
o Federal Reserve sought to stop inflation (late 70s) seeking a new balance
between confidence and liquidity
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