Dr. Arnab Dasgupta, Research Analyst at the Manohar Parrikar Institute for Defense Studies and Analysis made a presentation on “Japan’s Currency Crisis and its Implications” at the Monday Morning Meeting held on 15 July 2024. The session was moderated by Dr. R. K. Dhawan, Associate Fellow at MP-IDSA. Scholars of MP-IDSA attended the meeting.

Executive Summary

Japan made a significant transition from exerting hard power to prioritising soft power. The Japanese model was a mix of free market and socialist system. Later on, several Southeast Asian countries also adopted a similar approach to achieve their development goals. Countries such as Thailand, Malaysia, and Indonesia also adopted this economic model, and China and Vietnam have followed the same. This Japanese economic model was referred to as the ‘flying geese’ model. In the early 1990s, the collapse of massive assets led to a crisis in the Japanese currency. Several factors contributed to the devaluation of the Yen, including the interest rate differential between the US and Japan, as well as the huge selling of the yen, resulting in a decline in its value.

Detailed Report

The session started with remarks by Dr. R.K. Dhawan on how the value of the Yen degraded over a period of time. He talked about the Plaza Accord according to which Japan was pressurised to appreciate the Yen and that led to the downfall of the Japanese economy and what we call lost decades. Japan has not been yet able to recover from it.

Dr. Dasgupta commenced his presentation with an introduction to the rise of the Japanese economy after World War II. Japan from the beginning was the preminent economic power in the 1950s and 1960s. The rise was remarkable because it was risen from the ashes of the 1940s and after suffering two nuclear bombs which no country has faced. In his presentation, Dr. Dasgupta explained it all in brief.

In his presentation, he talked about the Japanese economy of the post 1940s and 50s era. After the decade when Japan surrendered, the country put into place a revolutionary system of ‘guided capitalism’, that would give a growth rate averaging around 8 to 10 per cent until the 1970s and 7 per cent until the 1990s which led to international economists coining the “Flying Geese” model for Asia and all over the world.

He emphasised the role of the US in reviving the Japanese economy during the Japanese economy’s lost decades. The accommodative policies of the US not only opened the market for its domestic manufacturers but also pegged the Yen to a fixed value against the dollar. However, the system that guided Japan to success also contained the roots essentially of its downfall because Japan’s antitrust laws encouraged the formation of giants called keiretsu.

He also highlighted the significance of the keiretsu and the impact of the real estate bubble. This economic bubble collapsed between 1991 and 1995, leading to a period of deflation in Japan. Consequently, there was a reduction in the prices of goods and services, accompanied by diminished cash flow and corporate profits. This downturn resulted in decreased production and a decline in employment opportunities, leading to a significant rise in unemployment. Subsequently, consumers began to economise on goods and services, contributing to an overabundance of supply in the market.

Further, he explained the effects of deflation in Japan. The main leading banks of Japan were on the verge of collapse. Many companies were red-listed. The wages of the employees were kept stagnant. People started saving which led to depressed consumption.

He talked about the Rise of Abenomics where he explained changes in the monetary and fiscal policy and some structural changes that were made. He explained the changes in the monetary policy which led to the crisis in the Japanese economy. The first target of Abenomics was setting an inflation target of 2 par cent so that the prices of goods would rise which would stimulate more production. The second was setting Yen volatility control so that the Yen became stable. Then was the negative interest rates under which banks had to pay the entity that was holding their funds. Next was the public investment by which the government would intend to invest capital directly into the economy. Finally, the quantitative easing (QE) by which the Bank of Japan (BoJ) would buy government and non-government bonds in the open market, and in effect, it could use credit liquidity to buy back its own debt. Besides all these, there was a fiscal policy that used consumption tax hikes to fund spending. They brought in structural reforms to strengthen antitrust laws, boost women’s participation, and increase immigration. When Haruhiko Kuroda was appointed as governor of the BoJ, he came up with some changes and initiated Yield Curve Control (YCC) in 2016, with rates of 0 per cent long-term, -0.1 per cent short and medium-term. Now the Banks had to pay BoJ interest for their deposits. After the implementation of these changes, the Abe government had some success in increasing GDP and inflationary expectations were created.

Further, Dr. Dasgupta explained the failures of Abenomics. Some of them are that the real GDP growth declined, consumption rates remained stagnant, the government deficit grew, and labor force participation lowered as structural reforms were never implemented.

Dr. Dasgupta explained the ramifications of Abenomics for the Japanese economy, highlighting a fluctuating pattern in comparison to the dollar. This was accompanied by a decline in both productivity and consumption, alongside mild inflation resulting from the aggressive quantitative easing (QE) that bolstered the value of the Yen vis-à-vis the USD. However, with the assumption of Kazuo Ueda as the Governor of the BoJ, the QE was terminated. Consequently, Japan found itself designated as a currency manipulator, rendering it susceptible to potential sanctions. Of note, the US initiated non-cooperation with Japan during the US-Japan-South Korea meeting, emphasising the need for close consultation.

He also spoke on the impact on tourism and defense modernisation, stating that Japan has increased its defense modernisation budget, ranking 6th in expenditure.

Questions and Comments

Scholars at MP-IDSA posed a diverse range of inquiries. Questions were raised about the internal pressure on Japan to strengthen the Yen, the structural changes in the Japanese economy, the potential impact of advancing Chinese technology, the decline of Japanese technology, and the role of the US in reinvigorating the Japanese economy.

Dr. Arnab Dasgupta provided insightful answers to the questions.

Report was prepared by Mr. Rajnish Kumar, Intern, Southeast Asia and Oceania Centre.