It is not possible to analyze today’s Japanese economy without considering the impact of the formation and collapse of the bubble and enormous fiscal deficits. The two policies that originated in the Structural Impediments Initiative noted above are intimately related to these phenomena. The policy coordination severely restricted Japan’s fiscal and monetary policies, which when combined with the sudden financial liberalization of the time and the delay in BoJ tightening, is frequently cited as a cause of the rise and fall of the bubble. The increase in public works investment of the Structural Impediments Initiative is also singled out as a remote cause of the fiscal deficit.
In fact, Japan’s fiscal and monetary policies have long been repeatedly swinging from success to failure. We cannot pin all the blame for the bubble’s expansion and collapse and for the fiscal deficits on the Structural Impediments Initiative in light of such macroeconomic shocks as the Japanese financial crisis, the Asian currency crisis, the GFC, and devastating natural disasters as well as the responses to these. Nonetheless, it is a deeply rooted view that there is a cause-and-effect relationship between the bubble and international policy coordination, including the impact of subsequent BIS regulations on Japanese financial institutions.
China had intensely researched Japan-US trade friction prior to the recent escalation of trade issues between it and the US. Chinese policymakers appear to view the Plaza Accord as responsible for causing Japan’s bubble and subsequent downturn and they are considered reluctant to substantially adjust the exchange rate as a result. Given the major changes to the environment for the Chinese yuan, this view is not necessarily correct now, but it is still highly likely that China has looked at Japan’s experience as an object lesson, including the Japan-US Structural Impediments Initiative.
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The extent to which the Plaza accords were instrumental in weakening the Dollar and thereby strengthening the Yen and how much that contributed to the bubble and subsequent stagnation in the Japanese economy is a major concern for the Chinese economy today.
Here is a section from a related report, also from Mizuho, discussing the likelihood for a lose/lose outcome to the deteriorating state of US and Chinese trade relationships.Click HERE to subscribe to Fuller Treacy Money Back to top