[Super Enjeo]② Japan's Economic Crisis Lifesaver... The History of Enjeo

Rapid Yen Appreciation Following 1985 Plaza Accord
Yen Depreciation Induced During Economic Crises to Revive Economy
Prolonged Yen Weakness Criticized for Increasing Poverty Among Japanese People

"The weak yen is ruining the Japanese economy and impoverishing its people. Japan's per capita national income will be overtaken by South Korea."

Yukio Noguchi, an emeritus professor at Hitotsubashi University and a senior Japanese economist, strongly criticized the harmful effects of the Japanese government's weak yen policy in his 2022 book, The Day Japan Falls Out of the Developed Countries. His arguments resonated significantly in Japan at the time, and the book became a bestseller.

His prediction quickly became reality. South Korea's per capita national income (based on GNI) surpassed Japan's for the first time last year. According to the Bank of Korea, South Korea's per capita GNI last year was $36,194, higher than Japan's $35,793.

Meanwhile, the weak yen phenomenon has worsened. The yen-dollar exchange rate, which fluctuated between 130 and 140 yen in 2022, recently surpassed 160 yen. This is the lowest level in 37 years and 7 months since December 1986. Although the yen showed slight strength last week, dropping to the high 150 yen range, concerns about yen weakness remain.

The weak yen has further lowered Japan's national income. When considering real purchasing power adjusted for price levels, the yen's value is at an all-time low. According to the Bank for International Settlements (BIS), as of the end of May, the yen's real effective exchange rate index was 64.45, the lowest since the 1970s. The real effective exchange rate indicates the actual purchasing power of a country's currency compared to other currencies.

With 2020 as the base year set at 100, a value above 100 indicates overvaluation compared to the base year, while below 100 indicates undervaluation. Last month's yen index was only 35.4% of its peak of 193.97 in April 1995. This means the yen is cheaper relative to other currencies than ever before. In real terms, the yen is weaker than the fixed exchange rate of 1 dollar = 360 yen maintained before the introduction of the floating exchange rate system in 1973.

The History of the Weak Yen Is Very Long and Frequently Recurring

Although the yen's value has fallen sharply this year, the history of the weak yen is very long. From the post-World War II period until the early 1980s, the yen-dollar exchange rate fluctuated between 200 and 300 yen. Thanks to the prolonged weak yen, Japan's key industries such as automobiles and semiconductors saw significant export growth, and Japan rose to become the world's second-largest economy after the United States.

However, the situation changed rapidly after the United States, burdened by Japan's rapid economic growth and the strong dollar phenomenon, strongly requested Japan to adjust its exchange rate, leading to the 1985 Plaza Accord. The U.S. summoned the finance ministers of Japan, the UK, Germany, and France to the Plaza Hotel in New York, strongly urging Japan to allow the yen to appreciate because it was undervalued and worsening the U.S. trade deficit. This was a demand for government intervention in the foreign exchange market, which should be left to market forces. Before the Plaza Accord, the yen was around 240 yen per dollar, but it appreciated about twofold to the 120 yen level by 1988, just two years later.

After the Plaza Accord, the sudden yen appreciation caused an economic downturn, prompting the Japanese government to implement policies such as interest rate cuts and easing real estate loan regulations to stimulate the economy. This led to a real estate and stock market boom from the late 1980s to the early 1990s, ushering in Japan's bubble economy era. At that time, there was talk that selling land in Tokyo could buy the entire United States, reflecting the soaring real estate prices.

As the asset market became bubbly, the Japanese government raised interest rates to curb it. However, the sharp rate hikes caused stock and real estate prices to plummet, leading to the bankruptcy of many companies and banks. This marked the beginning of Japan's so-called "Lost 30 Years."

With the rapid yen appreciation, severe economic recession, and the 1995 Kobe earthquake, the Japanese government requested major countries at the G7 summit to allow yen depreciation. The G7 countries agreed to Japan's request to control excessive yen strength. This is called the reverse Plaza Accord, after which the dollar strengthened and the yen weakened, helping Japan escape the rapid economic downturn.

Former Japanese Prime Minister Koizumi. Photo by Asia Economy DB

Former Prime Minister Koizumi's First Quantitative Easing Induced Weak Yen, Second Was Abenomics

After experiencing the 1998 Asian financial crisis, the yen appreciated again, raising concerns about economic recession. The Koizumi Junichiro Cabinet used the first quantitative easing policy in the early 2000s to induce yen depreciation.

While Japan maintained zero interest rates under quantitative easing, major countries like the U.S. raised policy rates, widening the interest rate gap. As a result, from 2004 to 2007, the yen depreciated about 8% against the dollar, marking a period of yen weakness.

Thanks to the weak yen, Japanese companies' profits increased significantly, and exports and capital investment improved, supporting Japan's economic recovery.

However, after the 2007 global financial crisis, the yen appreciated again, leading to the Abe administration's second quantitative easing and yen depreciation policy. Especially after the 2011 Great East Japan Earthquake severely impacted the Japanese economy, the Abe administration officially launched Abenomics in 2012.

The core of Abenomics was to flood the market with yen to lower its value. Former Prime Minister Abe even said, "I will turn the printing press to let the Bank of Japan print unlimited money."

Former Japanese Prime Minister Shinzo Abe visiting the 2018 Pyeongchang Winter Olympics = Archive photo. Photo by Hyunmin Kim kimhyun81@

Abenomics improved Japan's economy. Japanese companies' exports increased, and the stock market rose. However, import prices surged, making life difficult for the public. The large-scale quantitative easing and resulting weak yen brought both positive and negative effects to the Japanese economy, continuing to this day.

Yukio Noguchi, emeritus professor at Hitotsubashi University, stated, "Due to the Abe administration's weak yen policy, export companies' profits increased and stock prices rose, but the people became poorer," adding, "The bigger problem is that companies that easily gained profits neglected technological development and business model transformation."

Professor Noguchi also said, "The current weak yen phenomenon is reducing households' real income through rising prices and decreasing real consumption. The Japanese economy is in a stagflation situation."