By Akio Mikuni
Till particularly lately, the japanese encouraged one of those wondered awe. that they had pulled themselves jointly from the damage of struggle, outfitted at breakneck velocity a powerful array of export champions and emerged because the world's quantity financial system and biggest web creditor kingdom, and so they did it by means of flouting each rule of financial orthodoxy. at the present time, even if, in basic terms the puzzlement continues to be - at Japan's lack of ability to arrest its financial decline, for its festering banking difficulty and the dithering of its policymakers. Why cannot the japanese govt locate the political will to mend the country's difficulties? This quantity goals to reply to why. The authors contend that the rustic has landed in a coverage catch that defies effortless answer. Deep-rooted political preparations restrict the "obvious" measures steered at the nation by means of such a lot of observers. on the center of Japan's limitation, ironically, lies the main noticeable image of the country's fiscal good fortune: its huge, immense, dollar-denominated alternate surpluses. those large accrued surpluses have lengthy exercised a turning out to be and perverse impression on financial coverage, forcing Japan's gurus to help a build-up of deflationary funds.
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Additional info for Japan's Policy Trap: Dollars, Deflation, and the Crisis of Japanese Finance
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But it is not the outcome of a few recent cabinets trying to cling to power or of the jockeying among political parties to cultivate votes. Its roots lie far back in Japanese history, well before Japan’s construction of the political facade of a constitutional democracy—one governed, with one brief hiatus since 1955, by the stable, conservative Liberal Democratic Party (LDP). That facade has been useful in providing Japan with an acceptable face to the outside world and in neutralizing any potential for disorder from leftist or other dissatisfied groups with the capacity to make trouble.
11 By maintaining their foreign reserves in depreciating The Policy Trap 21 dollars, Japan and Germany were effectively transferring purchasing power to the United States and thus indirectly subsidizing American military spending in their respective countries. S. S. ” But once the Bretton Woods system crumbled, the Japanese found that the increasing piles of dollars began to pose all kinds of problems. They could not sell their dollars for German marks or Swiss francs. There was not enough of those currencies to begin with, and the German and Swiss governments would have reacted with outrage to such a move—but then, of course, Germany and Switzerland were not, unlike the United States, markets that had to be kept open to Japanese products at all costs.
By the mid 1960s, France had begun to exercise its rights under the Bretton Woods system to begin moving its reserves from dollars to gold. Later Paris mounted a joint effort with other European governments to construct, with the euro, an alternative to the dollar in the global monetary order. Japan never did anything like that; its control over its own foreign exchange earnings therefore has never really been tested. Several European nations had also accumulated substantial surpluses, but for the most part they did not leave their surpluses in dollars.