UNCLE SAM HIT THE SUMO !!!!

Due to my academic schedules and my SEM III exams of MBA I could not write the blog. Please find below the continuation of the previous Blog( UNCLE SAM's CHINESE PROBLEM)

During the 1980s due to heavy Japanese exports especially that of automobiles flooded the US markets which led to the outflow of the USDs to Japan leading to surpluses with Japan and deficits with the US, thus US blamed JAPAN’s undervalued Yen for the US deficits.

The long running dispute between the United States and Japan throughout the 1980’s and early 1990’s over the value of the yen ended only when Japan’s economy entered its “lost decades,” which has made the Chinese determined not to repeat the experience.

But, based on Japan’s experience, the Chinese do seem to have good reasons to be wary of US pressure to revalue the renminbi. Indeed, the economists Ronald McKinnon and Kenichi Ohno have singled out US pressure for yen appreciation as a key source of the Japanese economy’s long-term deflation and stagnation – the so-called “lost decade” of economic malaise that is now well into its second.

Chinese officials agonize over the US pressure. If they yield to it, the Chinese economy, they argue, may fall into the same deflationary trap that ensnared Japan after the yen’s appreciation in the 1980’s – under US pressure – inflated a catastrophic asset-price bubble. But if they continue to resist, China may face hot trade disputes with the US, which could be even messier.

Like Japan in the 1980’s, China must defend itself from US claims that the renminbi’s weakness is the source of the imbalances between the two countries. Currency appreciation, Japan argued then and China argues now, is unlikely to result in a significant current-account adjustment, which requires addressing not only China’s high savings rate, but also low savings in the US.

What is the Lost Decade?

The economic miracle ended abruptly at the very start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fuelled a massive wave of speculation by Japanese companies, banks and securities companies. Briefly, a combination of incredibly high land values and incredibly low interest rates led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.

Recognizing that this bubble was unsustainable (resting, as it did, on unrealizable land values - the loans were ultimately secured on land holdings), the Finance Ministry sharply raised interest rates. This popped the bubble in spectacular fashion, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the huge debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks having to be bailed out by the government.

Eventually, many become unsustainable, and a wave of consolidation took place (there are now only four national banks in Japan). Critically for the long-term economic situation, it meant many Japanese firms were lumbered with massive debts, affecting their ability for capital investment. It also meant credit became very difficult to obtain, due to the beleaguered situation of the banks; even now the official interest rate is at 0% and have been for several years, and despite this credit is still difficult to obtain.

Overall, this has led to the phenomenon known as the "lost decade"; economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life has been rather muted, however. Unemployment runs reasonably high, but not at crisis levels (the official figure is a little under 5%, but this is a considerable underestimate - the real level is probably around twice that). This has combined with the traditional Japanese emphasis on frugality and saving (saving money is a cultural habit in Japan) to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the miracle.