Dollar and Yen: Resolving Economic Conflict between the United States and Japan.

Abstract

"This book boldly challenges some of the basic assumptions and presumptions of international economics, such as the trade balance-exchange rate relationship, and the endogeneity of exchange rate with respect to other macro variables. These views should generate some serious debates about our basic theories and policy frameworks. The topics will be of great interest to policy makers and academic economists alike." -- Shang-Jin Wei, Associate Professor of Public Policy, Kennedy School of Government, Harvard University From the mid-1950s to the early 1990s, Japan grew faster than any other major industrial economy, displacing the United States in dominance of worldwide manufacturing markets. In the 1970s and 1980s, many books appeared linking the apparent decline of the United States in the world economy to "unfair" Japanese practices that closed the Japanese market to a wide range of foreign goods. "Dollar and Yen" analyzes the friction between the United States and Japan from the viewpoint of exchange rate economics. The authors argue against the prevailing view that the trade imbalance should be corrected by dollar depreciation, saying that adjustment through the exchange rate is both ineffective and costly. Stepping outside the traditional dichotomy between international trade and international finance, they link the yen's tremendous appreciation from 1971 to mid-1995 to mercantile pressure from the United States arising from trade tensions between the two countries. Although sometimes resisted by the Bank of Japan, this yen appreciation nevertheless forced unwanted deflation on the Japanese economy after 1985--resulting intwo major recessions ( "endaka fukyos" ). The authors argue for relaxing commercial tensions between the two countries, and for limiting future economic downturns, by combining a commercial compact for mutual trade liberalization with a monetary accord for stabilizing the yen-dollar exchange rate.