Abstract
During the First World War Japan experienced large surpluses on its external accounts which, via monetary expansion, drove up prices to an uncompetitive level compared with other leading economies such as the US and the UK. Similarly, following China’s devaluation of its currency and exchange rate reunification in 1994 along with the adoption of a fixed rate against the US dollar, China gradually built up huge external surpluses in the early 2000s, which continued even after the 2005-14 appreciation of the currency. For Japan in the 1920s the result of the overvaluation was a decade of financial crises, slow growth, agricultural depression and deflation. Only in December 1931 did the authorities finally abandon the fetish of returning to the pre-war exchange rate and devalue the yen, allowing Japan’s external accounts to return to equilibrium. In 2017, China is faced with essentially a similar set of choices as Japan in the 1920s.
Keywords. Central bank; Purchasing power parity; Balance of payments; Japan; China.
JEL. B25; G20; J71; N32; P16.
References
Bank of Japan, Statistics Department, Hundred-Year Statistics of the Japanese Economy, 1966
Patrick, Hugh, The Economic Muddle of the 1920s, in Morley, J.W., Dilemmas of Growth in Prewar Japan, Princeton, Princeton University Press, 1971.
Shinjo, Hiroshi, History of the Yen -- 100 Years of Japanese Money-Economy, Kobe University Research Institute for Economic and Business Administration, 1962.
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