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Japanese foreign exchange policy 1971–1982
JOURNAL
OF THE
JAPANESE
AND
INTERNATIONAL
ECONOMIES
6, 303-304
(1992)
RYUTARO KOMIYA AND MIYAKO SUDA [Translation editor: COLIN MCKENZIE], Japanese Foreign Exchange Policy 1971-1982, Allen & Unwin, Sydney, 1991. 378 pp., $45.00. The original Japanese version of this book was completed in the Spring of 1983. The careful translation involved a team of six-Corinne Boyles, David Lawson, Hayden Lesbirel, Colin McKenzie, Paul Sheard, and Ross Westcott. Despite the considerable lapse in time, the massive translation effort was worthwhile. What the reader gets is a remarkably detailed statistical and economic analysis of all the manifold changes in the yen/dollar exchange rate-and its impact on Japanese financial policy-on a month-to-month, and sometimes even week-to-week basis-from the breakdown of the Bretton Woods par-value system with yen appreciation in 1971 to the sharp depreciation of the yen over 1981-1982. Each of the first eight chapters treats a major identifiable exchange-rate “episode’‘-such as the Japanese government’s massive intervention to virtually stabilize the dollar rate at 265 yen from February 1973 to September 1974, or its failure to prevent the yen’s remarkable appreciation from 230 on May of 1978 until an internationally coordinated rescue operation put a floor under the dollar of 178 yen on November 1, 1978. The specific behavior of the yen/dollar rate is charted at the beginning of each chapter, together with relevant Japanese and American interest-rate data. Boxes contain detailed outlines of the numerous changes in Japanese regulatory measures to influence the direction of capital flows or imports and exports in each of these episodes. For students of exchange-rate history, this informed compendium of what actually happened from 1971 to 1982 is unlikely to be improved upon-and should remain the definitive reference work. But the two authors don’t pretend to develop any unifying conceptual framework to explain why exchange rates become so unexpectedly volatile after the par-value system collapsed. Although quite critical of the numerous interventions to smooth exchange-rate fluctuations that the Japanese government tried over this period, this absence of a conceptual framework 303 0889-1583192
$5.00
Copyright 0 1992 by Academic Press, Inc. All rights of reproduction in any form reserved.
304
BOOK
REVIEWS
of what should be done tends to vitiate their specific criticisms. For example, they strongly criticize the authorities for keeping the yen/dollar rate pegged for so long within a “too narrow” range around 265 in 1973-1974, but then they also criticize the government for not taking proper action to prevent precipitate yen appreciation in 1977-1978. They suggest that the government should elimitate all capital account controls: “We hold that the flow of foreign capital should be free and diversified” (p. 134). But they also want to adhere to the principle of national autonomy in the conduct of macroeconomic policies in each industrial economy. Yet they are acutely conscious of the fact that the regime of flexible exchange rates and free capital mobilty has failed to insulate the macroeconomic policies of Country A from Country B. One reason why their guidelines for “official” exchange-rate smoothing (they do not want explicit official target zones) are so ambiguous is their view that a (flexible) exchange rate is both useful and predictable for adjusting (minimizing) net trade imbalances. Therefore, with the natural ebb and flow of net trade balances between Japan and her trading partners, they see a continual need for exchange rates to adjust-presumably endogenously. Yet in the world of full private capital mobility which the authors advocate, trade imbalances could be more or less automatically financed if investors only knew that exchange rates would be kept within a narrow and fairly predictable band. But this requires some coordination of monetary policies across countries, which the authors don’t want to concede. Moreover, in such a world of free capital mobility, (endogenous) exchange-rate changes no longer have a predictable effect on the monetary value of net current account imbalances. Needless to say, the American government has been even more guilty of trying to “talk the dollar down” on numerous occasions-i.e., in 1971, 1973, 1977-1978, 1985, and 1987-in order to reduce America’s large trade deficits. So at bottom, fallacious theories of what determines the trade balance might well explain much of the “excessive” volatility in international financial markets which Komyia and Suda so neatly document. RONALD Department Stanford
of Economics University
I.
MCKINNON
OF THE
JAPANESE
AND
INTERNATIONAL
ECONOMIES
6, 303-304
(1992)
RYUTARO KOMIYA AND MIYAKO SUDA [Translation editor: COLIN MCKENZIE], Japanese Foreign Exchange Policy 1971-1982, Allen & Unwin, Sydney, 1991. 378 pp., $45.00. The original Japanese version of this book was completed in the Spring of 1983. The careful translation involved a team of six-Corinne Boyles, David Lawson, Hayden Lesbirel, Colin McKenzie, Paul Sheard, and Ross Westcott. Despite the considerable lapse in time, the massive translation effort was worthwhile. What the reader gets is a remarkably detailed statistical and economic analysis of all the manifold changes in the yen/dollar exchange rate-and its impact on Japanese financial policy-on a month-to-month, and sometimes even week-to-week basis-from the breakdown of the Bretton Woods par-value system with yen appreciation in 1971 to the sharp depreciation of the yen over 1981-1982. Each of the first eight chapters treats a major identifiable exchange-rate “episode’‘-such as the Japanese government’s massive intervention to virtually stabilize the dollar rate at 265 yen from February 1973 to September 1974, or its failure to prevent the yen’s remarkable appreciation from 230 on May of 1978 until an internationally coordinated rescue operation put a floor under the dollar of 178 yen on November 1, 1978. The specific behavior of the yen/dollar rate is charted at the beginning of each chapter, together with relevant Japanese and American interest-rate data. Boxes contain detailed outlines of the numerous changes in Japanese regulatory measures to influence the direction of capital flows or imports and exports in each of these episodes. For students of exchange-rate history, this informed compendium of what actually happened from 1971 to 1982 is unlikely to be improved upon-and should remain the definitive reference work. But the two authors don’t pretend to develop any unifying conceptual framework to explain why exchange rates become so unexpectedly volatile after the par-value system collapsed. Although quite critical of the numerous interventions to smooth exchange-rate fluctuations that the Japanese government tried over this period, this absence of a conceptual framework 303 0889-1583192
$5.00
Copyright 0 1992 by Academic Press, Inc. All rights of reproduction in any form reserved.
304
BOOK
REVIEWS
of what should be done tends to vitiate their specific criticisms. For example, they strongly criticize the authorities for keeping the yen/dollar rate pegged for so long within a “too narrow” range around 265 in 1973-1974, but then they also criticize the government for not taking proper action to prevent precipitate yen appreciation in 1977-1978. They suggest that the government should elimitate all capital account controls: “We hold that the flow of foreign capital should be free and diversified” (p. 134). But they also want to adhere to the principle of national autonomy in the conduct of macroeconomic policies in each industrial economy. Yet they are acutely conscious of the fact that the regime of flexible exchange rates and free capital mobilty has failed to insulate the macroeconomic policies of Country A from Country B. One reason why their guidelines for “official” exchange-rate smoothing (they do not want explicit official target zones) are so ambiguous is their view that a (flexible) exchange rate is both useful and predictable for adjusting (minimizing) net trade imbalances. Therefore, with the natural ebb and flow of net trade balances between Japan and her trading partners, they see a continual need for exchange rates to adjust-presumably endogenously. Yet in the world of full private capital mobility which the authors advocate, trade imbalances could be more or less automatically financed if investors only knew that exchange rates would be kept within a narrow and fairly predictable band. But this requires some coordination of monetary policies across countries, which the authors don’t want to concede. Moreover, in such a world of free capital mobility, (endogenous) exchange-rate changes no longer have a predictable effect on the monetary value of net current account imbalances. Needless to say, the American government has been even more guilty of trying to “talk the dollar down” on numerous occasions-i.e., in 1971, 1973, 1977-1978, 1985, and 1987-in order to reduce America’s large trade deficits. So at bottom, fallacious theories of what determines the trade balance might well explain much of the “excessive” volatility in international financial markets which Komyia and Suda so neatly document. RONALD Department Stanford
of Economics University
I.
MCKINNON