go down, as a key currency it should not do so. It cannot depreciate so much that it loses its meaning as the key currency. So, in fact, America had no alternative but to become more competitive and increase exports. Since it is impossible to regain over night something that has been lost over a period of years, the real agenda behind the SII trade talks was to get Japan to import more American goods and to get the United States to import less from Japan.
This put Japan in a peculiar position. Because exports had exceeded imports for some time, Japan had excess reserves that enabled it to import whatever it wanted. It was no longer necessary, as it once had been, to export in order to import. Thus, just as America continues to import even though it can no longer afford to do so, Japan continued to export even though it no longer needed to do so.* This exporting for the sake of exporting is illogical, economically speaking. The more Japan exports, the stronger the yen grows and the more unprofitable exporting becomes. It would make far better sense to spend the money at home. But no effort whatsoever was made to apply the brakes to Japan’s export drive. The more Japan exported, the more money came in so that it became even harder to say “stop.” What corporation would be willing to cut back exports and reduce tangible profits for the intangible good of the state? The worst aspect of all this is that Japanese society looks up to businessmen as its heroes, and everyone—both inside and outside government—listens to their views. The Recruit scandal and, more recently, the revelation of payments made to leading Diet members by Sagawa Kyubin, a parcel-delivery company, have given a glimpse of how pervasive the practice of influence buying is in Japan, and how deeply politicians are in the pay of business.
* Japan’s economic growth has reduced the already low level of Japanese imports still further. As imports decline and exports increase (or even remain the same), the trade surplus continues to grow.
America faces a similar dilemma. The fact that the dollar, as the key currency, cannot fall below a certain point, makes it even more difficult to say “stop importing.” Paradoxically, what has happened in both Japan and the United States as far as business is concerned is entirely rational economic behavior, and we can only assume that the present situation will continue as long as the IMF system remains unchanged.
Made in Japan—Breaking Down the Exchange Myth. As I mentioned earlier, when the value of the dollar declined by half and the yen doubled, Japanese corporations ended up making exactly the same profits as before. That was odd enough, but the 1985 currency realignment caused another strange phenomenon to occur. American exports to Japan ought, in theory, to have sold for half their former price (provided that demand elasticities were close to unity). This did not happen. At the very least, the curious sight of Japanese bringing back armloads of European goods that they had bought in the United States ought to have disappeared, but the crowds of Japanese shoppers in airport duty-free shops did not diminish at all. In other words, the benefits from the yen’s sharp rise against the dollar were not adequately passed on to Japanese consumers. Nor did prices for Japanese goods rise sharply in the United States. Since the value of the dollar was half what it used to be, the prices of Japanese goods ought to have been double what they once were, but that was not the case.
In fact, between 1985 and 1989 the prices of Japanese exports to the United States rose only about 8 to 10 percent despite the fact that the yen had doubled in value. How was that possible? There are two lines of thought on this matter. The first view is that Japanese businesses did not take much of a profit on their exports, that they made their money by setting a high price domestically and holding down export prices to a level where they at least did not sustain a loss. The other view is that, to ride out the strong yen, Japan focused its efforts on restructuring and technological innovation. As a result, costs came down so substantially that there was no need to raise prices.
Although the cheap dollar seemed to offer the United States the perfect opportunity to expand its exports to Japan, it was unable to do so. Why? There are two lines of thought on this question as well. One is that America’s export effort was inadequate; the other is that the Japanese market has so many barriers that no matter how hard America tries it cannot get in.
All of these views are probably true. The price of Japanese goods certainly did not double. That is because Japanese business took the loss, and also because they steadily reduced costs and thereby increased their ability to resist the effects of a strong yen. The fact that American exports to Japan did not noticeably increase is due both to the failings of America’s own export efforts and to Japan’s reluctance to open its market. These overlapping factors formed the background to the Japan-U.S. Structural Impediments Initiative talks.
Yet, while everyone complained that the price of American exports to Japan did not go down in proportion to the yen-dollar exchange rate, even though this proved disadvantageous to the Japanese consumer, everyone blithely accepted the fact that prices for Japanese exports to the United States did not rise much. Properly speaking, the amount of increase or decrease should be symmetrical, and it seems unfair that there was so much hostility to the one and no acknowledgment of the other. After all, if the price of Japanese goods ought to have risen by 100 percent, but Japanese companies kept the increase down to only 8 to 10 percent, they ought to be thanked for their contribution to holding down inflation in the United States. But instead of being grateful, Americans blamed Japan for the fact that U.S. products did not sell for half price in Japan. This is what economics calls asymmetry.
Physical phenomena usually occur symmetrically. If 70 degrees Fahrenheit is the ideal temperature for human beings, then anything higher than 70 degrees is considered hot, anything lower is cold, and discomfort is felt proportionally at the higher or lower temperatures. Although the same ought to hold true for economic phenomena, one extreme was welcomed, the other was decried. That is what makes economics so difficult. It is human nature, of course, to keep silent about something advantageous to one’s own pocket-book. The Japanese, however, should have drawn attention to this situation and stated their case firmly, but they remained strangely inarticulate. If Japanese officials and the mass media had made Japan’s position better known to the American public, the attitude of ordinary Americans might be considerably different. It would certainly be more beneficial to both countries if the Japanese media concentrated their talents and efforts on giving a clear account of Japan’s position rather than producing sensationalist programs like the one mentioned earlier on American racism.
The appreciation of the yen and the devaluation of the dollar after the 1985 Plaza Accord did not have the expected results. The participants now concede that all their tinkering with the exchange rates had almost no effect on imports and exports. Take, for example, the videocassette recorder (VCR). In the beginning neither the Japanese nor the Americans anticipated the size of the market for VCRs. The machines did not sell well at all in the 1970s, but in the early eighties they suddenly became popular, and by 1985 nearly a third of all American households had VCRs, almost all of which were made in Japan. After the Plaza Accord the yen suddenly shot up and the dollar dropped, until ultimately the yen was worth nearly twice what it had been. Logic dictates that the price of Japanese VCRs should have doubled during that period and sales should have dried up. In fact, after 1985 sales of VCRs rose by leaps and bounds, first, because the price did not go up and, second, because American incomes increased greatly after 1985. As a result, Japanese exports of VCRs grew seventeenfold between 1985 and 1990, and by 1989, 75 percent of all American households had a VCR.
One other factor needs to be taken into consideration to account for the failure of the currency realignment to affect sales of VCRs: Japan’s virtual monopoly of the VCR market. A monopoly renders the exchange rate mechanism ineffective because the exchange rate can adjust for surpluses and deficits only when substitute products are available from other countries. At present, export figures for VCRs are declining, an indication that the market is mature and that most purchases now are to replace older models. But a situation quite similar to the one for VCRs in the 1980s is evolving in the market for facsimile machines. As in the case of VCRs, Japanese companies
