Connecting The Dots …
1973-1985. The Japanese were strutting on the world stage.
1973-1985. The Japanese were strutting on the world stage. In their hubris, one Japanese businessman declared that the only world-class product made in USA was maple syrup. The Japanese manufacturing juggernaut seemed unstoppable. Japanese management was the first lesson and the last word in business schools. Companies like Xerox, FedEx, Motorola adopted various ‘QIP’ systems – quality improvement processes.
Finally, the Americans decided that the yen-dollar exchange rate was the culprit. In 1985, the US worked out a deal whereby the US dollar was devalued. Only it was not called a devaluation. It was called the Plaza Accord.
Without a formal devaluation, the Plaza Accord allowed Americans to depreciate the dollar against other currencies – especially the Japanese Yen. Intense negotiations spread over nearly a decade followed. During a crucial negotiation in Japan, in 1992, a stressed out George Bush Sr., vomited and fainted.
Endaka – and the end of the Japanese run
From August 1971 through April 1995, the yen’s value ratcheted up from 360 to the dollar to 80 to the dollar. This was primarily because some U.S. industries, anxious about their eroding share of world markets, put political pressure on American politicians. The American government in turn put pressure on Japan’s politicians and central banking officials to keep raising the value of the yen against the dollar. With some support from academic economists, American producers argued that a higher-valued yen would help their products sell better in competition with Japanese products and therefore reduce the American trade deficit.
the prospect of Japan’s emerging as the dominant financial power in the world is very disturbing, not only from the point of view of the United States but also from that of the entire Western civilization
For the next 10 years, the Japanese economy stagnated, investments stagnated. Their dream of supplanting the US as the world’s largest economy were over – for now at least.
The 90s was decade of the Asian Tigers. Korea, Malaysia, Thailand, Indonesia, Singapore were all set to replace Japan as the axis of world economy. India especially came out as a distant plodder against these countries. Lee Kuan Yew, held forth on the Indian character was faulty – and could not compete with the Chinese-Confucian value-set.
Then followed the Asian Crisis. Mahathir Mohammed claimed that the 1997 Asian Crisis was a foreign conspiracy. Specifically, he named George Soros as the master mind behind the Asian Crisis. 9 years later, Mahathir made up with George Soros – and retracted his charge.
The ostensible reason was that investors in the Asian Tigers were funding long-term investments from short-term borrowings – a classic mismatch. The rapid withdrawal of foreign funds impacted development of these economies to the extent of a decade.
The 2 trillion trap
After the Asian crisis, China was in a better position to resist American pressure for renminbi revaluation.
That resistance to renminbi revaluation, in turn, caught China, in another trap. China has US$ 2 trillion worth of rapidly depreciating foreign reserves.
Which brings us to India!
What will it be
What are the threats to the Indian economy! Will it be a ‘sudden’ collapse in software and outsourcing? Or will it be a severe contraction in gems and jewellery exports? Can it be a 3 year drought due to global warming?
- In Japan, No Holiday for the Yen (blogs.wsj.com)
- G-20 shows no interest in high yen (search.japantimes.co.jp)
- You: Rising yen, falling prices, cheap beer (search.japantimes.co.jp)
- You: Japan Moves to Weaken the Yen (nytimes.com)