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

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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 in two 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.

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What People Are Saying

From the Publisher

"This book boldly challenges some of the basic assumptions andpresumptions of international economics, such as the tradebalance-exchange rate relationship, and the endogeneity of exchangerate with respect to other macro variables. These views shouldgenerate some serious debates about our basic theories and policyframeworks. The topics will be of great interest to policy makersand academic economists alike." Shang-Jin Wei, Associate Professor of Public
Policy,Kennedy School of Government, Harvard University

The MIT Press

Makoto Kuroda
This book should be carefully studied by the policymakers of both Japan and the US in order to avoid the recurrence of 'the syndrome of ever-higher yen',that is distinctly suboptimal for both of them.
Koei Narusawa
What is most striking as well as encouraging to me, a practitioner, is that the authors, as distinct from mainstream academics, highlighted 'mercantile pressure' associated with US-Japan trade disputes as a major driving force for the Dollar-Yen exchange rate performance (ever-higher Yen syndrome) over the past 25 years. By doing so, the authors brought an important ingredient of political economy into the conventional domain of exchange rate theory.
Robert Dekle
I find this an important and provocative volume. It is a worthwhile contribution to the literature."
Shang-Jin Wei
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.
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Product Details

  • ISBN-13: 9780262133357
  • Publisher: MIT Press
  • Publication date: 6/13/1997
  • Edition description: New Edition
  • Pages: 276
  • Product dimensions: 6.10 (w) x 9.10 (h) x 1.00 (d)

Meet the Author

Ronald I. McKinnon is William D. Eberle Professor of International Economics at Stanford University. He is the author of several books on international economics and development finance, including The Rules of the Game: International Money and Exchange Rates (MIT Press, 1996) and, with Kenichi Ohno,Dollar and Yen: Resolving Economic Conflict between the United States and Japan (MIT Press, 1997).

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Table of Contents

1 Introduction: The Syndrome of the Ever-Higher Yen 1
2 Policy Causes and Postwar Origins of Japan-U.S. Economic Conflict: Differential Productivity Growth and the Saving Shortage in the United States 21
3 Exchange-Rate Fluctuations and Their Consequences: Price Diffusion and Endaka Fukyo 51
4 Balancing International Competitiveness in the Longer Run: Wage Adjustment versus Yen Appreciation 73
5 The Transfer Problem and Macroeconomic Fluctuations: Endaka Fukyo, Bubbles, and Credit Crunches 93
6 The Exchange Rate and the Trade Balance in Theory: Insular versus Open Economies 125
7 The Exchange Rate and the Japan-U.S. Trade Balance in Practice: A Critique of the Modern Elasticities Approach 143
8 Monetary and Exchange-Rate Regimes, Inflation Persistence, and the Volatility of Long-term Interest Rates 163
9 Price Deflation and Purchasing Power Parity: A Causality Analysis of Yen Appreciation and Japanese Monetary Policy 177
10 Overcoming the Syndrome: Toward a U.S.-Japan Commercial Compact and Monetary Accord 205
11 Is the Syndrome Over? The Fall of the Yen, 1995-96, and Its Implications for the Transition 223
Notes 237
References 247
Index 257
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