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Commentary: Learning from the Yen
( 2003-08-22 07:20) (China Daily)

The impact that the revaluation of the Japanese currency, the yen, has had on the country's economy should serve as a profound lesson to all countries, especially developing countries.

In 1949, Japan adopted a unitary system with a fixed exchange rate, in which 360 yen equaled US$1.

The system avoided fluctuations in the value of the yen over the next 20 years, bringing a swift recovery and a boom to the Japanese economy.

During the 1960s, Japan maintained an annual economic growth rate of 10 percent. By 1968, Japan's gross domestic product (GDP) had already surpassed that of then West Germany, making it the world's second-largest economy after the United States.

Since the late 1980s, however, Japan has been plagued by a "bubble economy'' and suffered a protracted economic recession since the early 1990s, when the economic bubble collapsed.

In 1998, the Japanese economy witnessed its most serious recession with a negative growth rate of 1.9 percent.

The situation was mainly the result of Japan's short-sighted revaluation of its currency during the 1980s.

The yen revaluation started to gain a radical momentum after a meeting attended by the finance ministers and heads of the central banks of five countries, namely the United States, Japan, former West Germany, Britain and France, in New York on September 22, 1985.

The main purpose of the meeting was to push the appreciation of the yen to reverse its high exchange rate with the US dollar and improve their trade balance with Japan.

From this meeting to the end of the 1990s, the value of the yen was raised twice by a large margin.

In September 1985, the exchange rate of the yen with the US dollar was 240, but by 1987 the exchange rate was 120.9. Namely, the value of yen against the US dollar nearly doubled within two years.

With the dramatic revaluation of the yen, Japanese exports suffered from a radical decline and its economic situation also further deteriorated.

During the period from 1986 to 1987, Western countries realized a comparatively rapid economic resurgence, while Japan experienced a serious economic recession. Japan is the only country whose economic recession was brought about by the revaluation of its currency.

From World War II to the early 1980s, Japan's economic growth rate was much higher than that of the United States and European countries. But its economic growth has slowed down remarkably since the late 1980s.

To extricate itself from the economic predicament caused by the appreciation of the yen, the Japanese Government adopted a relaxed financial policy to reverse its economic slump and stimulate economic revitalization.

In May 1987, the Japanese Government decided to execute a 1 trillion yen tax cut plan and put an additional 5 trillion yen into public works. In July that year, Japan decided to expand its fiscal expenditures by 2 trillion yen.

At the same time, the Japanese central bank began lowering the interest rate for five consecutive years from January 1986 and decreased the discount rate from 5 to 2.5 percent in 1987, which was the lowest since World War II.

Notably, at the time when other developed countries were undergoing an economic upsurge and had begun to witness rampant market speculation, the Japanese Government's measures to spur economic development by adopting a relaxed financial policy sowed seeds for the country's bubble-ridden economy.

As a result, Japan suffered a long-term economic recession during the 1990s as its economic bubble broke up. That decade was therefore called "the lost 10 years'' in the country's history.

Statistics from the World Bank show that Japan's GDP maintained an annual growth rate of 1.3 percent from 1990 to 2000, much lower than that of the United States, which was 3.4 percent.

In the first three years of the 21st century, the Japanese economy has still been bogged down in sluggishness.

Japan's experience, from the yen's revaluation to the collapse of its bubble economy, leaves deep lessons for other countries.

The first lesson is that a country should discreetly calculate chances, scope and affordability when deciding on a revaluation of its currency.

For a long time into the future, the US dollar will remain the main currency for foreign exchange reserves, trade settlements and circulation. Thus, only the United States can afford, in accordance with its domestic demands, to adjust the US dollar's exchange rate.

The outbreak of an economic crisis in Mexico and Southeast Asia demonstrates that developing countries, without strong economic and financial strength and the capacity to handle financial fluctuations, should be prudent in making decisions concerning appreciating or devaluing their currencies. Otherwise, serious consequences may occur.

The second lesson is that a country should take measures to prevent major foreign trade and investment risks.

Japan's substantial trade surplus with the United States since 1964, which stood at US$60.99 billion in 2002, has prompted the United States to adopt various ways to exert pressure upon Japan to appreciate the yen.

The purchasing craze that Japan started overseas in the late 1980s left a great risk for the country's economy.

At that time, Japan began all-out investment overseas. When its transnational companies began a mass retreat from overseas markets in the 1990s, heavy losses ensued.

It is said that Japan lost its trade surplus over the United States after its bubble economy collapsed.

The author is a senior researcher with the Center for World Affairs Studies under the Xinhua News Agency.

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