The Yen Appreciation and the Japanese Economy

Following the collapse of the Bretton Woods regime, the economic and financial turmoils of the 1970s and the recession that set in in 1979, the international economy, particularly that of the industrialised countries, entered a palmy period of economic expansion in 1982. This was not to be a mere short-term upswing but a new phase of dynamic growth driven by technological innovation and bearish oil prices that continued uninterrupted for the rest of the decade. The level of oil prices is a significant variable because according to an estimate a 20 per cent decline in the oil prices raised the growth rate by 0.2 per cent in the industrialised economies during this period.1 The flexible exchange rate regime, liberalised capital markets and freer capital movements had increased the interaction of economic policies — especially monetary policies — among the industrialised market economies as well as internationalised the capital markets. In such an economic milieu, which was becoming something approaching laissez faire and for a while Adam Smith seemed to be running the show, the exchange rates could well become dominated by capital flows and the natural operation of market forces could work to undermine the exchange rate and balance of payments adjustment mechanism which the neoclassical economists assume.