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The Syndrome of the Ever-Higher Yen, 1971-95:<br> American Mercantile Pressure on Japanese Monetary Policy

May 1997
Working Paper
By  Ronald McKinnon, Kenichi Ohno, Kazuko Shirono
From August 1971 through to April 1995, the yen ratcheted up against the dollar because of mercantile pressure from the United States, which was anxious to dampen its eroding market shares in manufacturing and burgeoning trade deficits. While temporarily ameliorating political tensions arising out of innumerable Japan-U.S. trade disputes, these great yen appreciations imposed relative deflation on Japan without correcting the trade imbalance between the two countries.

Although resisting sharp yen appreciations in the short run, the Bank of Japan validated this syndrome of ever-higher yen by following a dependent monetary policy that was deflationary relative to that independently established by the U.S. Federal Reserve System. The appreciating yen was a forcing variable in determining the Japanese price level. After 1985, this resulted in great macroeconomic instability in Japan including endaka fukyo (high-yen-induced recessions) in 1986-87 and more severely in 1992-95. These recessions further curtailed Japan's imports, thus widening her trade surplus, and so further aggravated American mercantilists.

This unfortunate cycle was (temporarily?) suspended in the summer of 1995 only after authorities in the U.S. Treasury finally recognized that the Japanese macro-financial system was on the verge of collapse. In addition to suspending trade hostilities, the American and Japanese governments collaborated to drive the yen back down by almost 50 percent form its April peak. This permitted the modest recovery of the Japanese economy in 1996-97. But whether the syndrome of the ever-higher yen is over, or is simply in remission, remains to be seen.