The Yen Appreciation and the International Economy by Dilip K. Das

By Dilip K. Das

Concurring with the choice of the G-5 international locations to understand the yen in the course of the Plaza accord used to be of momentous importance for Japan simply because this was once the sharpest appreciation one of the best currencies within the fresh prior. Doubling the price of the foreign money in any such brief time-span may have ended in a stifling of the financial system. rather than being smothered, besides the fact that, the japanese economy—after the short endaka recession—entered into the longest upswing of the company cycle of the postwar interval. the first concentration of this publication is the strength of the post-appreciation eastern fiscal growth because it was once felt via constructing and industrialized international locations. via 1989 the japanese economic climate had emerged because the biggest creditor country, the biggest giver of relief, and the most important economic climate making international investments. turning into banker of the area, its banks and securities agencies started to dominate overseas monetary markets, and with 111 jap businesses within the Fortune 500 record for 1990, it additionally grew to become a big company presence within the overseas economic climate.

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If the real effective exchange rate is taken as an indicator, this appreciation caused a loss of competitiveness for the Japanese exports by as much as 30 per cent. That a major restructuring of the economy is needed was apparent to the managers of the Japanese economy and the radical measures suggested by the Maekawa committee did not surprise anypne. The proposed strategy called for such a fundamental economic restructuring that most doubted the ability of the Government to perform. However, the yen appreciation became a propelling force and managed to bring about many of the proposed changes.

The imports of manufactured products doubled in the short span of five years. Currency appreciation caused a demand shift from domestic to imported products in durable consumer goods and several manufactured products, consequently several domestic production lines and many low-tech producers were driven out of the market. It eventually shifted the axis of international trade from vertical to horizontal specialization. The increased imports of the Japanese economy contributed to production growth abroad and the Japanese economy began to play 'locomotive' role in the international economy.

The gross fixed capital formation declined by 32 per cent from its previous year's level. It has been noted that the nominal corporate profits also plunged in 1986. The economy absorbed the deflationary impact of the high yen by mid-1986 and the bottom of the endaka recession was reached in June 1986, thereafter, vide ut supra the economic activity displayed a gradual and sustained recovery led by domestic demand. An extraordinary rebound in capital spending was the other propelling factor. 6 per cent.

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