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Time of Troubles: The Yen and Japan's Economy, 1985-2008

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  • Maurice Obstfeld

Abstract

This paper explores the links between macroeconomic developments, especially monetary policy, and the exchange rate during the period of Japan's bubble economy and subsequent stagnation. The yen experienced epic gyrations over that period, starting with its rapid ascent after the March 1985 Plaza Accord of major industrial countries. Two distinct periods of endaka fukyo, or recession induced by a strong yen, occurred in the late 1980s and the early 1990s at critical phases of the monetary policy cycle. My approach emphasizes the interaction of short-term developments driven by monetary factors (as they affect international real interest rate differentials) and the long-term determinants of the real exchange rate's equilibrium path. Chief among those long-run determinants are relative sectoral productivity levels and the terms of trade, including the price of oil. Since the mid-1990s, the yen's real exchange rate has generally followed a depreciating trend and Japan's comprehensive terms of trade have deteriorated.

Suggested Citation

  • Maurice Obstfeld, 2009. "Time of Troubles: The Yen and Japan's Economy, 1985-2008," NBER Working Papers 14816, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14816
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    2. Wynne, Mark A. & Zhang, Ren, 2017. "Estimating the Natural Rate of Interest in an Open Economy," Globalization and Monetary Policy Institute Working Paper 316, Federal Reserve Bank of Dallas.
    3. Vahagn Galstyan & Philip R. Lane, 2009. "The Composition of Government Spending and the Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1233-1249, September.
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    7. Duo Qin & Xinhua He & Yimeng Liu, 2010. "Exchange Rate Misalignments: Historical Experience of Japan, Germany, Singapore and Taiwan Compared to China Today," Working Papers 667, Queen Mary University of London, School of Economics and Finance.
    8. Rod Tyers & Ying Zhang, 2011. "Japan’s Economic Recovery: Insights from Multi-Region Dynamics," CAMA Working Papers 2011-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East

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