Plaza Accord and Japan’s “lost decade”

 

jamesin reply to Teik Min Lim 2 days ago 1 comment collapsed CollapseExpand

The Plaza accord was signed in 1985 and was a multilateral agreement between France, German, Japan, the US, and the UK.
Japan didn't ruin their economy by allowing currency appreciation. It had a minimal (almost no) effect on the Japanese trade surplus. The "lost decade" was the result of rapidly aging demographics and relying too heavily on fixed asset investment for growth. Japan is a trade surplus country and has been for a long time but they now have, by far, the largest proportion of debt in the world and weaker purchasing power than their nominal GDP would otherwise indicate. Currency manipulation bring short-mid term benefits while fueling unsustainable debt in other parts of the world; however it will catch up with the currency manipulator later on big time via big hits to ROI and lagging "real" competitiveness. Foreign currency reserves parked in treasuries making less in interest than the rate of inflation are a very poor investment policy.
Japan was hit with heavy social security costs that were captured by the government. China with its weaker social security net will put more burden on working class children to support the elderly subtracting from productivity. So it's not like the costs can be avoided by simply ignoring the problem.
The myth that avoiding calls for ending currency manipulation and keeping trade protectionism in place will ensure China avoids a Japan-like crisis seems to be alive and well. Unfortunately it's dead wrong, China is facing Japan's greatest problem (a rapidly aging population) and making the same big mistakes (amassing unsustainably large poorly invested foreign currency reserves while relying too heavily on fixed asset investment to drive growth). What China doesn't have that Japan had are friendly growing markets in the US and EU; both regions will see weak growth and are likely to become more protectionist when fiscal stimulus proves ineffective. The "Asian export model" will almost certainly fall apart this decade.

Why China’s Heading for a Hard Landing, Part 1: A. Gary Shilling - Bloomberg