Economic History Case Studies: The Third Lost Decade (2022)  

The previous Blog post outlined the ongoing extent of Inflation in the US and the EU/NATO member-states during the Coronavirus Pandemic. I provided bar graphs to demonstrate how the Inflation Rates for the US Dollar and the Euro rose dramatically during the Spring and Summer months of last year. These graphs were created by the European Central Bank, disseminating their findings to the public in late 2021. Additionally, I also pointed out that the vast majority of products that saw the largest price increases were petroleum-based products, such as unleaded gasoline or jet fuel. The sole outlier was automobiles, which is related to the growing unavailability of superconductors, not to mention the logical complications associated with its production in China. As a follow up to that particular post, I will be discussing about one of the major case studies for the Work-Standard, post-1945 Japan.   

The Japanese Yen, in recent weeks, has become undervalued compared to the other two aforementioned currencies. This comes as the US is currently pursuing a contractionary monetary policy in the Liberal Capitalist sense. Consider the following article from Barrons on the matter:

“The Japanese yen has dropped like a rock. The market has become convinced that—arguably, after a late start—the Federal Reserve has begun the most aggressive tightening cycle seen in a generation. Meanwhile, the Bank of Japan has signaled its resolve to cap its 10-year bond yield at 0.25% indefinitely.

The yen depreciated 6% against the U.S. dollar in April, pushing the dollar above JPY131 for the first time in two decades. The demand for dollars has been so intense that at one point, it rose for 13 consecutive trading days. According to the Organization for Economic Cooperation and Development’s purchasing-power parity measure, the yen is now more undervalued against the dollar than at any point in over 30 years.

While the yen is historically undervalued, the forces driving it lower aren’t exhausted. The divergence between U.S. and Japanese monetary policy is stark. The U.S. is tightening monetary policy aggressively, while Japan sits with an open-spigot monetary policy.”

The ongoing trend inside the Bank of Japan (BOJ), from what I could tell, is that Interest Rates will continue to remain in the negatives. The Negative Interest Rates, which became a reality in 2016, remains poised to persist for the foreseeable future. It is perplexing to learn about the decision in light of how high the Interest Rates were in the last few decades, the actual area of historical focus within The Work-Standard, the 1980s. In a time where Inflation Rates are rising among the various Western countries and their central banks pursuing contractionary monetary policies, Japan has proven itself to be a sort of outlier that breaks the trend. The question that I have yet to ascertain is how this deviation from the pervasive trend will continue before the Japanese follow suit.

For those who do not remember or are just encountering my Blog for the first time, the economic and financial history of post-1945 Japan is a recurring case study in my research. This is because of the trends which were occurring in that country during 1980s and 1990s. To quote what I had written in the SMP Compendium entry, “Japan’s Lost Decades and the Rise of Zombie Firms and Zombie Banks”:

“The ‘Lost Decade’ refers to an economic and financial crisis that affected Japan, the effects of which continue to linger since the 1990s. The Japanese economy was devastated by the bursting of the asset-price bubble that came as the consequence of the 1985 Plaza Accord. Prior to any serious Western economist commenting on the meteoric resurgence of Mainland China, Japan was the nation-state that attracted the most attention after the death of Bretton Woods. The Japanese economy in the 1980s was the leading contender against the economic strength of the US economy to the point of sparking a Trade War during the presidency of Ronald Reagan.

The American-Japanese Trade War was sparked over the rising trade deficits of the US economy and the unwillingness of the Japanese to adjust Exchange Rates. The US Dollar in the early 1980s was still suffering from high Inflation during Reagan’s first term, its Value depreciating in the midst of two Recessions. The Federal Reserve had its Interest Rates increased to reduce the amounts of US Dollars in circulation as Kapital, allowing the US Dollar to appreciate and bring the US out of its Recessions. One of the results that culminated from this affair in relation to the Japanese was the Plaza Accord, of which Japan was a signatory member of.

The Plaza Accord was followed by the Louvre Accord of 1987, when the US Dollar was allowed to depreciate further in order to offset the US trade deficits as well as the Federal budget deficits due to the Reagan administration’s adherence to ‘Supply-Side Economics.’ The Plaza Accord’s significance in relation to the Lost Decades is tied to the Japanese Yen appreciating in Value as a result of the US Dollar depreciating. The terms of the Plaza and later Louvre Accords contributed to the Japanese economy undergoing a Recession between 1985 and 1986, which concurred with the onset of an asset-price bubble that the Bank of Japan (BOJ) was reluctant in curtailing.”

As I had stated in the next paragraph of that Compendium Entry, the BOJ has had a previous record of being reluctant in making sudden changes to its monetary policies. There is an insightful passage, which I feel is relevant in today’s political climate, wherein I wrote that the BOJ made the decision to make borrowing Kapital easier at reduced Interest Rates in order to promote Inflation to offset Currency Appreciation.

“The BOJ figures prominently into why there little or no intervention in avoiding the excesses of the asset-price bubble during the late 1980s. As the Japanese Yen appreciated during this period, the BOJ tolerated a contractionary monetary policy while the economy was expanding because of an overreliance on exports and Kapital for foreign investments only. But when the Yen continued to appreciate towards the end of the decade, the Japanese pursued a belligerent combination of monetary and fiscal policies. On the monetary side, the BOJ allowed for monetary easing that made borrowing cheap Kapital easier at preferrable Interest Rates for potential Borrowers. And on the fiscal side, the national government increased public investments to generate Inflation to offset Currency Appreciation.”    

The passages emphasized by me are in reference to the trend which emerged in the wake of the initial Lost Decade and still lingering to this day. At first, the Japanese national economy and financial regime began the 1990s with rising Deflation and thus Currency Appreciation. The consistent goal of various parliamentary governments since then was to create artificial Inflation, to impose Currency Depreciation on the Yen to counteract against the effects of the Lost Decades. To understand the significance of what I am about to describe here, some visual aids are needed.

The following line graphs are Japan’s Interest Rates since the first decade of the Lost Decades. Notice how much Interest Rates has fallen from their peak in the early 1990s to their near 0% rates throughout most of the 2000s and 2010s. The other line graph depicts the occurrence of Negative Interest from 2016 onwards.

Next, compare the two line graphs with this graph depicting the Japanese Inflation Rate around the same period. Do note that the graph also features a projection of where the Inflation Rate would be heading in the next four years.

Based on available historical data, past records, and contemporary trends which I had discussed in The Work-Standard, it would seem that the BOJ’s hesitance at pursuing a contractionary monetary policy now is rooted in its past activities. If their goal for the past thirty years is to create artificial Inflation to induce Currency Depreciation, it is unreasonable to expect the BOJ to go in the opposite direction. To reverse its present course by introducing artificial Deflation and in turn Currency Appreciation runs contrary to the goal of getting Japan out of its still-ongoing Lost Decades. An undervalued Yen is far more preferable than an overvalued one. At least, that is what I can infer from the past three decades of policies taken by the BOJ.    

Categories: Economic History

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