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Japan'S Deflationary Hangover: Wage Stagnation And The Syndrome Of The Ever-Weaker Yen

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  • RONALD MCKINNON

    (Economics Department, Landau Economics Building, Stanford University, Stanford, California 94305-6072, USA)

Abstract

Japan still suffers a deflationary hangover from the great episodic yen appreciations of the 1980s into the mid-1990s. Money wages are still declining, and short-term interest rates remain trapped near zero. After Japan's "lost decade" from 1992 to 2002, however, output has begun to grow modestly — but through export expansion and associated investment rather than domestic consumption. This export-led growth has been helped by a passive real depreciation of the yen: prices and wages in Europe and the United States have grown, and are growing, faster than in Japan. As the yen becomes weaker in real terms, American and European industrialists and politicians are again complaining that the yen is too weak (Japan bashing II?) — although the pressure on Japan to appreciate is not yet as great as it now is on China.But Japan is trapped. If it does appreciate the yen, its fragile economy will be driven back into outright deflation. The only solution is to stabilize the nominal dollar value of the yen over the long-term, but this step will not necessarily be immediately effective in placating foreign mercantilists. Under foreign pressure to appreciate the renminbi, China, with its booming economy, is now in a similar position to Japan's of more than 20 years ago. Policymakers in China should resist pressure to go down the same deflationary road as Japan.

Suggested Citation

  • Ronald Mckinnon, 2007. "Japan'S Deflationary Hangover: Wage Stagnation And The Syndrome Of The Ever-Weaker Yen," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 52(03), pages 309-334.
    • Handle: RePEc:wsi:serxxx:v:52:y:2007:i:03:n:s0217590807002749
    DOI: 10.1142/S0217590807002749
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    References listed on IDEAS

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    1. Ronald McKinnon & Gunther Schnabl, 2006. "China's Exchange Rate and International Adjustment in Wages, Prices and Interest Rates: Japan Déjà Vu?," CESifo Economic Studies, CESifo, vol. 52(2), pages 276-303, June.
    2. Christian Broda & David E. Weinstein, 2007. "Defining Price Stability in Japan: A View from America," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 169-206, December.
    3. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133350, December.
    4. Qiao, Hong, 2007. "Exchange rates and trade balances under the dollar standard," Journal of Policy Modeling, Elsevier, vol. 29(5), pages 765-782.
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    Cited by:

    1. Ronald I. McKinnon, 2010. "China in Africa: The Washington Consensus versus the Beijing Consensus," International Finance, Wiley Blackwell, vol. 13(3), pages 495-506, December.
    2. Ronald Ian McKinnon, 2007. "The US current account deficits and the dollar standard’s sustainability: A monetary approach," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(04), pages 12-23, January.

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