- 14 -

path of the yen-dollar exchange rate. Measurement problems caused by
differences in composition of price indices across countries complicate PPP
calculations. Moreover, a number of factors can warrant sustained
deviations from PPP, and this section will examine some of these factors.
Productivity growth. One of the primary factors contributing to
improved competitiveness in Japan is that Japanese productivity g”owth has
outpaced that of its major trading partners, including the United
States. Chart 7 illustrates Japan's sharp gains in productivity in
manufacturing relative to the United States. The chart focuses on
productivity in the manufacturing sector since a growing percentage of
Japanese exports are manufactured goods -- about 85 percent in 1935.
Japan's rate of productivity growth has slowed considerably since

the 1960s, as can be seen in the table below.

Productivity Growth in the United States and Japan

(annual percentage growth in output per hour in manufacturi rg)

Period Japan United States
1950-59 11.4 2.1
1960-69 14.8 3.0
1970-79 TeT 2.5
1980-84 4.8 3.4

Source: Bureau of Labor Statistics, March 1986.

The remarkably rapid growth in Japanese productivity in the 1950s and 1960s
reflected in part the fast pace of technological innovation deriving from a
backlog of exploitable foreign technologies. The slowdown in productivity

growth in Japan's manufacturing sector over the past 15 years reflects in


- 32 -

The BLS calculates relative productivity as the ratio of the
productivity index of the reference country to the trade-weighted
average index for 11 trading partners. Rates of change are computed
from the least-squares trend of the logarithms of this ratio.

Paul Krugman (1986) provides additional details on the manufacturing
surplus-primary commodities deficit phenomenon in Japan, and compares
it to a similar situation in Germany.

This section draws on the interesting study of Japanese savings by

- Randall Jones (1986).

13.

14.

The real wage in chart 8 is hourly compensation in manufacturing,
national currency basis (BLS, March 1986), divided by the wholesale
price for manufacturing industry products (BIS tape, 1986). The
productivity data come from the same source as in the table on page 1
(BLS, March 1986). .

For a more detailed description of this proposal, see the WIDER Report
(1986).

Sean Craig of the Federal Reserve Board's Division of International

* Finance kindly provided the estimates and calculations from the Japan

16.

sector of the MCM model.

See "EPA World Economic Model" (1984).


- 28 -

trade balance with Japan. Still, these results may help explain why
Japan's trade surplus with the United States soared in recent years as the
United States economy grew rapidly.

V. Concluding Remarks

The interaction between the exchange value of the yen and the
Japanese current account has served as a unifying thread throughout this
paper. The yen's exchange value appears to have played a potent role in
fostering current account adjustment in Japan, but exchange rate movements
have not sufficed to maintain external balance. Another central theme of
this paper has been that developments affecting Japan's current account
have had an important influence on the longer-run course of the yen-dollar
exchange rate. The sizable gains in competitiveness and the tendency for
total savings to exceed domestic investment have contributed to a tendency
towards persistent Japanese current account surpluses and an associated
tendency for the value of the yen to rise, except in the wake of major
disruptions such as the oil price shocks of the 1970s.

It is interesting to note that an examination of policy analyses
in 1972, just prior to the commencement of floating exchange rates, points
to a striking parallel between the adjustments recommended for the Japanese
economy at that time and those offered today, almost 15 years later. For
example, the 1972 OECD Economic Survey stated:

A determined policy of import stimulation would seem an
indispensable complement to the revaluation...It would take the
wind out of protectionist sails in foreign markets and contribute
to welfare....It could also assist growth in many of Japan's
developing ‘partner countries...While it is clear that relative
cyclical positions played a large role in explaining the record

current surplus last year, the striking.tendencies registered in
the Japanese trade balance with Western industrialized countries


- 10A -

CHART 4

09g

08

OOL

Oe

Ol

O91

Og!

00¢

Ode

Ove

O09¢

9861

veél c8él O86! 8Z6l 9Z61 vL6l

I T I I T I I I I I ] T I

N3A/QNNOd HN = ————
NSA/ONVYSA HONSYA = -------- -
N3A/Wd = -------
N3A/av1100 SQ = —————

vr
(O01 = £261 HOUVN) SSLVY SDNVHOXE IVYSLVIIE NAA



-17-

and its surplus on manufactures. The result has been persistent current
account surpluses and associated upward pressure on the yen.

Real wage growth. Chart 8 illustrates another factor that,
combined with rapid productivity growth, has resulted in improved
cost-competitiveness of Japanese exports: real wage growth in the Japanese
manufacturing sector has tended to lag behind labor's productivity gains in
the most recent years, except following the first oil shock.12 This
relatively slow growth of real wages is related to the system of industrial
relations that prevails in the large Japanese firms. As is well-known,
lifetime employment, seniority wage setting, bonuses linked to profits, and
company~based unions are key factors contributing to real wage
flexibility in Japan. This system appears to strengthen employees!
commitment to the company and its long-run vitality, leading to wage
settlements that are relatively compatible with company interests. During
the annual Spring wage negotiations -- the so-called "Shunto" initiated in
1955 -- company performance is a primary consideration recognized by both
labor and management. As was noted earlier, Japanese labor's willingness
to accept moderate wage increases in the aftermath of the second oil shock
in 1979 despite rising inflation helped prevent the unleashing of a
prolonged wage-price spiral.

Looked at from a different perspective, the recent slow growth of
real wages can inhibit growth of domestic demand and hence limit the
derived demand for imports. This phenomenon was an issue in this spring's
wage round, when some recommendations for measures to stimulate domestic

demand included references to the need for faster wage growth to spur


- 33 -

REFERENCES

Dean, Edwin, Harry Boissevain, and James Thomas (1986), "Productivity and
Labor Cost Trends in Manufacturing, 12 Countries." Monthly Labor__
Review, March. .

Economic Planning Agency (1984), "EPA World Economic Model, February 1984
version." EPA World Econometric Model Discussion Paper number 16;
Japan.

Frankel, Jeffrey A. (1984), "The Yen-Dollar Agreement: Liberalizirg
Japanese Capital Markets." Institute for International Economics,
Policy Analyses in International Economics number 9, December.

Freeman, Richard (1984), "Aspects of Recent Japanese Financial Market
Liberalization." Mimeo, Board of Governors of the Federal Reserve
System, May.

Frenkel, Jacob A. and Michael L. Mussa (1985), "Asset Markets, Exchange
Rates and the Balance of Payments." In Ronald W. Jones and Peter B.
Kenen (eds.), Handbook of International Economics, vol. 2. Amsterdam:
North Holland, pp. 679-747. oo

Jones, Randall S. (1985), "Japan's High Savings Rate: An Overview." Japan
Economic Institute Report no. 46A, Washington, D.C., December.

Krugman, Paul (1985), "Is the Strong Dollar Sustainable?" National Bureau
of Economic’ Research Working Paper no. 1644,

(1986), "Is the Japan Problem Over?" Mimeo for NYU
Conference on Trade Frictions, April. .

Marston, Richard C. (1986), "Real Exchange Rates and Productivity Growth in
the United States and Japan." Mimeo for an American Enterprise
Institute Conference on Real-Financial Linkages, January.

Odano, Sumimaru (1986), "Integration and Efficiency of Japanese Financial
Markets." Mimeo, International University of Japan, February.

Report of a Study Group of the World Institute for Development Economics
Research (WIDER), "The Potential of the Japanese Surplus for World
Economic Development." Tokyo, Japan, April.


I. An Historical Overview of the Yen-Dollar Relationship

In April 1949, the official Japanese exchange rate was
established at 360 yen = US$1, and in May 1953 this rate was agreed with
the International Monetary Fund as the par value. It was not until
December 20, 1971, after four months of floating following the suspension
in August of the dollar's convertibility to gold, that the yen exchange
rate was revalued to a central rate of 308 yen = US$1 and wider fluctuation
margins were set.

During the preceding 22 years of an unchanged exchange rate of
the yen against the dollar, the Japanese economy had undergone a dramatic
structural transformation. While in the 1950s Japanese exports were widely
viewed as being of such inferior quality that they could not compete
successfully with products from the major industrial economies, by the
early 1970s Japan had developed burgeoning trade surpluses with many of
these same economies. The implied undervaluation of the yen together with
the fundamental disequilibrium in the U.S. external accounts were two
principal elements of the international imbalance that led to the demise of
the Bretton Woods system. After the failure of measures in mid-1971 aimed
at diminishing Japan's rapidly increasing trade surplus, the yen was again
revalued in early 1972, this time to yen 301 = US$1 where it remained until
the advent of floating in February 1973. In the early months of floating,
the yen strengthened further against the dollar, for a total appreciation
of 27 percent since 1971.1 Chart 1, which traces movements in the
yen-dollar exchange rate since 1960, shows the yen's steep appreciation

over this period.


- 26 -

commodity composition of those imports: 60 percent of total imports are
fuel and raw materials that are relatively difficult to substitute away
from in the production process when their relative prices rise. Consistent
with this view, estimates from the Japanese Economic Planning Agency's
macrceconometric model indicate that the relative price elasticities of
fuel and raw materials imports are about one-sixth the size of the relative
price elasticity of manufactured imports for Japan. 16 In contrast,

nearly 90 percent of Japan's exports are manufactured goods, including 70
percent machinery and industrial equipment, for which relatively close
substitutes exist in the world market. As a result, importers of Japanese
goods can more easily switch to cheaper alternative sources of manufactured
goods,

What impact will the 35 percent appreciation of the yen against
the dollar in the past 15 months have on Japan's bilateral trade surplus
with the United States? A very rough calculation based on the MCM
equations suggests that the yen's recent 35 percent rise against the dollar
could over time result in as much as a $20 billion reduction in Japan's
current $50 billion trade surplus with the United States.17 (J-curve
effects lasting up to one year, according to MCM simulations, would prevent
this improvement from becoming apparent immediately.) This simple
calculation assumes that the yen appreciation occurred as a deus ex
Machina, so that other effects of any policy changes that may have
encouraged the appreciation are not considered. Also the calculation
assum2s that the Japanese authorities take the policy steps required to

maintain real income growth. To the extent that real income growth in


veel oe6t 9461 ec46l 896l v96l O96! 956 e2Sél pir
TTTTTTTTTTTTrTrTrTrrrTrrrrrrrrrrrrrdri

OOL

ole}

- 144 -
Chart 7

oos

OOL

006

OOll

OO! + -7 ALIMLONGOYd YOSV] NVavr

- ae
oost /L-- ALIALONGOYd YOSV] SN _|

OO/| — | teen eee: ~

"

ONINNLOVANNVW NI YNOH Yad LNdLNO


_S@6l 2861 G6L6l 946 S61 O/Gl L961 ¥96l 196,
80 TTT

Sb a

- 18A -

SIF 7

Chart 9

yea Z|
= O61
ANIVA LINN LYOdWI/SNIVA LINA LYOdXxX4

AJ0VUL AIO SWYAL ASANVdVE


- 16 -

exaibit a tendency towards appreciation over the floating rate period even
as the productivity gap has narrowed.

Regional pattern and composition of trade. An important impetus

to Japan's rapid productivity gains in manufacturing has been the need to
develop a surplus in manufacturing trade to offset a persistent deficit on
energy and raw materials trade. Given an extreme dependence on imported
raw materials, Japan typically has run trade deficits vis-a-vis countries
classified as developed primary producers (such as Australia, Canada, New
Zealand and South Africa) and vis-a-vis oil exporting nations (particularly
Saudi Arabia, Indonesia and Iran). To offset this persistent deficit on
primary commodity trade, Japan typically runs a surplus on its
mariufacturing trade. The dramatic gains in productivity in manufacturing
that Japan has achieved relative to its major trading partners, including
the: United States, have helped Japan achieve a substantial surplus on its
trade in manufactured goods,11

While Japan exports a growing amount of manufactures to the
United States, its imports of food, raw materials and other commodities
from the United States have not kept pace, leading Japan to run a trade
surplus with the United States every year since 1968. A similar situation
currently exists with many of Japan's European trading partners and is a
prinary source of recent trade frictions. Thus, Japan's longer-run
tendency towards trade surplus with the United States and her European
trading partners is in part the counterpart of her deficit on raw materials.
Still, Japan's gains in competitiveness appear to have surpassed those

required just to achieve balance between its deficit on primary commodities


-27-

Japan slows, the reduction in the surplus will be less. Of course, any
estimates based on historical experience provide at best a rough guide to
the current situation, when we may well be in previously uncharted
territory. Still, this calculation illustrates that the yen's recent rise
could make an important contribution towards reducing Japan's current
account surplus.

Efforts to stimulate domestic income growth in Japan and thereby
to induce an increased demand for imports could also help foster external
adjustment. However, while the effect of Japanese domestic demand
expansion on overall imports may be sizable, results from the MCM suggest
the effect may not be as great on Japan's imports from the United States:
the estimated income elasticity of demand for imports from the United
States is quite low, while the income elasticity of demand for total.
Japanese imports is greater. In particular, the responsiveness of Japan's
imports from developing countries to increases in Japanese real income is
substantial, roughly twice that of imports from the United States.

Part of the explanation for these results again derives from the
commodity composition of imports from the two areas. Fuel and primary
commodity imports are a large share of imports from the developing world,
and such imports are highly sensitive to changes in the pace of industrial
production in Japan. The share of these commodities in total imports from
the United States is much smaller.

On the export side, Japan's exports to the United States are
highly responsive to changes in U.S. income. However, one would hardly

want to recommend a recession in the United States to improve our bilateral


-13-

yen's exchange value, it is still clear that, over the longer-run,
financial liberalization will allow and éncourage wider use of the yen in
international transactions.

Ill. Secular Influences on the Yen-Dollar Relationship

Much of the descriptive analysis of movements in the yen-dollar
exchange rate in Section II has focused on relating medium-run movements in
the exchange rate to macroeconomic, financial and balance-of-payments
developments. But the yen has exhibited a tendency over the past 15 years
to strengthen on balance against the currencies of all its major trading
partners, The question inevitably arises as to what longer-term -nfluences
might be generating this secular appreciation of the yen.

Differences in relative prices across countries provide a
starting point for evaluating longer-run trends in exchange rates.
According to the purchasing power parity (PPP) theory, if consumers have
similar tastes across countries, international arbitrage in goods markets
will lead prices of identical goods in different countries, expressed in a
common currency, to be equalized over time. From a position of initial
equilibrium, if the exchange rate exactly followed a PPP path, the real
exchange rate would be constant.

A rough illustration of the deviations from PPP is provided in
Chart 6, which displays the path of the yen-dollar exchange rate adjusted
for changes in relative wholesale prices in Japan and the United States.
It is evident that the yen-dollar exchange rate has not closely followed
relative price movements over the floating rate period. However, such

evidence should not be construed as necessarily implying an inappropriate


Japanese capital markets that picked up momentum starting in 1979. Prior
to that time, controls on capital inflows and outflows were instituted or
relaxed as a direct means of reversing sharp sustained movements in the
exchange value of the yen. Liberalization measures of particular
importance were the opening of the Gensaki (government bond repurchase)
market to non-resident investors in 1979, which offered a powerful channel
for international interest arbitrage, and the December 1980 Foreign
Exchange and Foreign Trade Control Law which established the general
principle that external transactions should be decontrolled subject to
prudential guidelines, emergency clauses and certain residual restrictions
that would gradually be relaxed. The 1980 law marked the end of the
discretionary use by the Japanese authorities of restraints on capital
inflows and outflows to influence the yen exchange rate.

Since February 1985, the yen has strengthened about 35 percent
against the dollar as part of a generalized decline of the dollar against
the major currencies, In the eight months since the September 22, 1985
Plaza meeting of the G-5, the yen's appreciation has been particularly
sharp, rising nearly 30 percent against the dollar and about 20 percent on
a weighted-average basis. This most recent period of yen appreciation was
initially encouraged by coordinated intervention and monetary policy
actions in Japan and other G-5 countries, as well as by a widespread
Perception in the exchange markets that economic factors, such as those
discussed in Section III below, warranted a stronger yen.

From this overview of the yen-dollar relationship under floating

exchange rates, five main points emerge. First, while day-to-day gyrations


- 24 -

may be structural in nature, while the Japanese authorities have argued
that the structural surplus is much smaller.

Should we be concerned that Japan is a net capital exporter? Are
measures to reduce savings in Japan really desirable from the standpoint of
world welfare? Forcing a reduction in Japanese savings would tend to
reduce Japanese net foreign investment and hence to raise the level of
interest rates abroad. Instead the focus should be on encouraging the most
efficient and equitable global redistribution of Japanese savings. If real
returns in the United States continue to decline and the fiscal deficit
narrows, it is likely that Japanese foreign investment will gradually
diversify away from U.S. investments. It might be hoped that rates of
return on investment in developing countries would be attractive enough to
draw a substantial portion of these Japanese funds.

An interesting recent analysis from WIDER (World Institute for
Development Economics Research) suggests that since Japan will be unable to
absorb fully its domestic savings, it will need to continue to rely on
current account surpluses in order to continue channeling excess savings
abroad. 14 WIDER proposes that to counteract the global contractionary
impact; of any reduction in the United States' fiscal and trade deficits,
Japan should "redirect" the surplus towards financing productive capital
formation in the developing countries. Japan's savings represents a large
potential source of investment in developing countries. If the Baker Plan
is followed, Japanese funds could be drawn to the Third World as more

coherent macroeconomic policies help attain such goals as sustained lower


-21-

spending, with the goal of eliminating bond financing of the central
government deficit by fiscal year 1990. ‘The Japanese government views
fiscal reconstruction as a prerequisite for sustainable noninflationary
growth, and for providing scope for the future budgetary demands that will
be associated with the aging of the population.

The prospect that this gap between total Japanese savings and
domestic investment will be completely eliminated in the near future is
small, although some factors may lead to a decline in savings over time.
Most studies indicate that demographic factors are key determinants of the
high savings ratio in Japan. With the rapid aging of the Japanese
population (the share of the population over 65 is projected to rise to 16
percent by the year 2000 and to 22 percent by 2020), those currently in an
earlier stage of the life-cycle are saving for retirement. It is likely
that, in the future, this factor would imply some reduction in the savings
rate; with a larger share of the population over 65, the savings rete
should decline. Other reasons cited for the current high savings rate may
change less over time. These include precautionary motives (savings for
unexpected disasters), housing (the average Japanese home costs nearly
eight times average annual income and mortgage interest is not tax
deductible), children's education and marriage, and tax-free interest on
small savings accounts.

Of these factors, government policy can have most direct
influence on housing investment and the preferential tax treatment of
savings. Indeed, a report on possibilities for medium-term structural

change aimed at reducing the Japanese external imbalance -- the so-called


From 1973 to 1975, the yen depreciated irregularly against the
dollar. Throughout 1973, Japan experienced a worsening inflation that was
initially due to an unusual degree of synchronization of the expansions in
Japan, the United States and many other economies. During this period,
the strongest 0.E.C.D.-wide boom in 20 years, prices of certain raw
materials imports surged, including the October 1973 oil price explosion.
The ensuing large wage settlements in Japan set off a wage-price spiral
that sent Japanese prices soaring, with wholesale and consumer prices
jumping at respective rates of 37 and 26 percent (on a year-over- year
basis) at their peaks in February 1974. This was the worst episode of
inflation in Japan since the early 1950s. Inflation in the United States,
while also accelerating, peaked at 19 percent for wholesale prices and 12
percent for consumer prices (on a year-over-year basis) in November 1974.

The period of adjustment to the first oil shock in Japan lasted
several years. The oil price hike hit Japan just as the economy was
showing signs of overheating and the Japanese authorities were already
concerned about accelerating inflation. In 1974, the Japanese economy
entered an 18-month recession, the most severe recession in Japanese
post-war history. In response to accelerating inflation, stagnating growth
and a deteriorating balance of payments, the yen depreciated 16 percent
against the dollar between June 1973 and December 1975. After running a
record current account surplus of $6.6 billion in 1972, Japan ran a string
of current account deficits from 1973 through 1975, the first such deficits

since 1967.


-3A-
CHART 1

9961 feel og6 ZL6l +26) 1261 e961 S96l e296l
(oS) a os Oe Oe OO

og!
Qt

00¢

Oecd

Ove

09¢

O8e

oof

O¢ce

Ove

o9e

oss _

3IVH SONVHOXE HVTIOG/NSA


- 13A -

Chart 6

986l £86b O86!
TTT TTT TT

ZL6L = v6 LL6L
TT TTT? TT

eget sget 2ge “YY
ee

08 F
06 +
ool F
Ol F
Od +

4
OFl

Ovl F

OSL —
OO} = £26) HONVN

31Ve¥ SDNVHOXE YVTIOG/N3AA GALSNrav-idM


- 6A -

CHART 3

asr

9961 Sg6él vgél £e6l eg6él be6L ogél 6461 eZ6l LL6L

- (A1V9S LHOId)
WILNSYSSSIG ALVY LSSYSALNI Wau
—- Wu31-SNOT NVdvf-sn

--

“(aqvos 1437)
3LVY JONVHOXS
YYTIOG/N3A TW3u

og

sg

OL

SL

oe

sg

06

S6

OoL

sol

Olt

S1NIOd S9VLNS0Yad OO = £26) HOUVNW

WILNSY S410 3LVed LSSYSLNI TVS" WHAL-ONOT GNV
ALVu¥ FJONVHOXS YUVTIOG/N3AA TVA

Si


- 17A -

Chart 8

OOl

OLL

Odl

Ol

Ov

OSl
Ogl

OZL
oel

O61
00¢

ye6l S86l ZR6I 1861 OSG! 646! BZ6l LLEl 9L6l SL6EL vLEL SZEl voir

T ] T I T I I T T T T

3OVM ATYNOH 1W3uY
[— ALIA LONGOYd YOUV) ——— 7

Oo} = £96) ‘31VOS O1LVY

HOLOSS DSNINNLOVANNVW SSANVdVP SHL NI
HLMOYSD ALIALLONGOYd GNV ADVM Wad


International Finance Discussion Papers
Number 288,

June 1986

THE YEN-DOLLAR RELATIONSHIP: A RECENT HISTORICAL PERSPECTIVE

by

Manuel H. Johnson
and

Bonnie E, Loopesko

NOTE: International Finance Discussion Papers are preliminary materials
circulated to stimulate discussion and critical comment. References in
publications to International Finance Discussion Papers (other than an
acknowledgment that the writer has had access to unpublished material)
should be cleared with the author or authors.


A fourth feature of the floating rate Period is that there
appears to have been a strong positive correlation between Japanese current
account surpluses and yen appreciation. Japan has run current account
surpluses almost continuously since 1965, except during the years
immediately following the two oil shocks of the 1970s. Periods of strong
yen appreciation have tended to correlate closely with periods of growing
current account surplus, although the appreciation eventually induces a
reduction in the surplus as shifts in demand occur in response to the
associated relative price changes. Ina Period of low international
mobility of capital, such as that prior to 1979, so-called "flow" models of
exchange rate determination would predict that trade flows may have a
substantial impact on the exchange rate. If strict capital controls
prevent a capital account surplus from emerging to finance a curreit
account deficit, then the exchange rate will have to depreciate in order to
foster a reduction of the current account imbalance. That link becomes
more complicated when financial liberalization permits a high degree of
capital mobility across borders.

With capital mobility, current account developments can still
influence the exchange rate through a variety of channels. Unanticipated
current account developments may affect the exchange rate by revealing new
information about changes in long-run competitive positions among countries.
This channel is discussed further in Section III. In addition, current
account movements may influence the exchange rate through a portfolio
balance channel: current account imbalances result in a redistribution of

wealth among countries, and because investors in different countries may


in exchange rates may defy explanation in terms of fundamental economic
factors, the broad swings in the yen-dollar exchange rate are consistent
with our general theories of the relationship between domestic and global
economic developments and exchange rate movements. For example, periods of
high inflation tend to correspond with episodes of yen weakness

Second, the steep and rapid appreciation of the yen that has
occurred in the past 15 months is not entirely outside the range of
historical experience. For example, from the third quarter of 1977 through
the fourth quarter of 1978, the yen appreciated about 30 percent. It is
important to note, however, that such sharp exchange rate movements over
relatively short periods do impose considerable burdens of adjustment on
Japanese industry.

A third point is that, for Japan, movements in interest
differentials began to correlate more closely with exchange rate swings
starting in the 1980s after significant financial liberalization had
occurred in Japan. Thereafter, short-run movements in the yen's foreign
exchange value are probably best viewed from the standpoint of asset market
models of exchange rate determination.4 In these models, short-run
exchange rate fluctuations result from the rapid equilibration of supply
and demand in the markets for foreign exchange. Because current exchange
rates determined in an efficient financial market already summarize all
known relevant information, it is primarily unanticipated developments in a
wide spectrum of macroeconomic and financial variables that influence

exchange rate changes in these models.


IFDP
NUMBER

275

274

273

272

271

270

269

268

267

266

265

264

263

International Finance Discussion Papers

TITLES

A Method for Solving Systems of First Order
Linear Homogeneous Differential Equations
When the Elements of the Forcing Vector
are Modelled as Step Functions

International Comparisons of Fiscal Policy:
The OECD and the IMF Measures of Fiscal
Impulse

An Analysis of the Welfare Implications of
Alternative Exchange Rate Regimes: An
Intertemporal Model with an Application

1985
(partial listing)

Expected Fiscal Policy and the Recession
of 1982

Elections and Macroeconomic Policy Cycles

Assertion Without Empirical Basis: An
Econometric Appraisal of Monetary Trends

in ... the United Kingdom by Milton Friedman
and Anna J. Schwartz

Canadian Financial Markets:
Proposal for Reform

The Government's

Was It Real? The Exchange Rate Interest
Differential Relation, 1973-1984

The U.K. Sector of the Federal Reserve's
Multicountry Model: The Effects of
Monetary and Fiscal Policies

Optimal Currency Basket in a World of
Generalized Floating: An Application to
the Nordic Countries

Money Demand in Open Economies:
Substitution Model for Venezuela

A Currency

Comparing Costs of Note Issuance Facilities
and Eurocredits

Some Implications of the President's Tax
Proposals for U.S. Banks with Claims on
Developing Countries

35

AUTHOR(S).

Robert A. Jonson

Garry Schinasi

Andrew Feltenstein
David Lebow
Anne Sibert

William H. Franson
Arminio Fraga
Robert A. Johnson

Kenneth Rogoff
Anne Sibert

David F. Hendry
Neil R. Ericsson

Garry J. Schinasi
Richard Meese
Kenneth Rogoff

Hali J. Edison

Hali J. Edison
Erling Vardal

Jaime Marquez
Rodney H. Mills

Allen B. Frankel


- 23-

The structural features of the Japanese economy highlighted above
Suggest that Japan will tend to be a net exporter of capital in the years
to come. There are few signs that household savings will decline
substantially; growth and investment are unlikely to reaccelerate to the
fast paces experienced in the 1960s; and some degree of fiscal restraint is
likely to be maintained in the near term. The yen's recent substaritial
gains will probably result in a sizable reduction of the Surplus below the
current level, although the size of the reduction will hinge in part on
developments in the oil market as about one-third of Japan's imports are
petroleum and petroleum products. Nevertheless, the remaining surplus
deriving from the structural features of the Japanese economy could be
quite large.

The concept of a structural surplus ina country's external
accounts is rather vague; it is intended to highlight the importance for
the path of the current account of differences across countries in
endowments, preferences, and other fundamental characteristics of an
economy. AS a consequence, there is no precise way to calculate the size
of the structural surplus, nor does the assertion that a surplus is
Structural imply that it is not influenced by policies. As suggested
above, structural adjustment policies are being discussed. Moreover, the
influence of macroeconomic policies on exchange rates, interest rates and
other variables will strongly influence the actual path of the current
account and can offset some of the underlying structural forces.
Abstracting from these considerations, simulations by the staff of the

O.E.C.D. suggest that half of the present Japanese. current account surplus


- 22 -

Maekawe. report released last April -- recommended abolition of the tax
exemption on small savings accounts and urged a sweeping reform of Japanese
housing, policy (through tax deductions for housing, stabilization of land
prices, and easing of regulations hampering real estate development). The
recommendations of the Maekawa Commission are currently under review by the
Japanese authorities.

Is Japan a "Natural" Capital Exporter? Japanese and foreign

proposals for measures to reduce Japan's yawning current account surplus
often have acknowledged the importance of both competitiveness factors and
the underlying imbalance between savings and domestic investment in Japan.
Japan has been urged to stimulate domestic demand, including investment, by
taking expansionary fiscal and monetary actions and by adopting measures to
discourage household savings. The Japanese authorities have responded
recent:.y by promoting a sharp appreciation of the yen to foster improved
external balance, and by three 1/2 percentage point reductions in the
discount rate since January to stimulate domestic demand. So far, however,
they have refrained from significant fiscal stimulus in light of their
deficiz reduction goals. On the United States side, the low U.S. savings
rate also contributes to its trade imbalance with Japan, and the
Gramm-Rudman-Hollings act is seen as an important step towards reducing
United States government dissaving. Still, the recent plunge in oil prices
together with the J-curve effects of the yen's appreciation have more than
offset the short-run impact of these measures on Japan's current account,
and Japan is expected to run an even larger current account surplus

(measured in dollars) this year than last.


fiscal restraint. These policy actions were instrumental in promot:ng the
moderate nominal wage settlements in the spring 1980 wage round. A‘.though
the current account deteriorated further in 1980 to an annual defic:t of
$10.7 billion, the turn-around in both inflation and the external balance
was already evident by late 1980.

The Japanese current account moved back into surplus in 1981. As
the current account surplus increased more than tenfold from $4.8 billion
in 1981 to $49.3 billion in 1985, the yen strengthened substantially on a
weighted-average basis but passed through two periods of substantial rises
and declines against the dollar. From January 1981 through February 1985,
the dollar rose steeply against many major currencies, gaining 39 percent
on balance against the German mark and 42 on an effective basis. The
dollar's net appreciation over those four years against the yen was less,
amounting to only 29 percent.

Starting in about 1981, movements in the yen-dollar exchange rate
frequently corresponded to changes in the interest differential between yen
and dollar securities. In particular, movements in the differential
between real returns on yen and dollar-denominated securities, particularly
at the long end of the maturity spectrum, started to correlate more
closely, though it is important to note far from perfectly, with
fluctuations in the real yen-dollar exchange rate. These two series are
displayed in Chart 3.3

That this correlation between interest differentials and exchange
rate movements became more evident in the early 1980s may not be a

coincidence: it coincides closely with the substantial liberalization of


-15-

part the elimination of ready opportunities to adopt foreign technologies
and in part structural changes in the composition of investment. As Japan
became a more mature industrial economy in the 1970s, a greater share of
investment was geared towards the service sector (where productivity was
lower), social welfare, anti-pollution and other activities.9 Still, Japan
has maintained faster productivity growth in manufacturing than her major
trading partners, while the United States and Germany, for example, hzve
had slower productivity growth in manufacturing than their respective

trading partners, as can be seen in the table below,10

Changes in Productivity Growth in Manufacturing
Relative to 11 Trading Partners
(relative annual percentage changes in output per hour)

Period Japan United States Germany
1960-73 5.9 73.9 -0.3
1973-84 3.0 “1.7 “0.5

Source: Dean et al, Monthly Labor Review, 1986.

In fact, of the 12 countries considered in the BLS study from which the
above table is taken, Japan had the most rapid increases in relative
productivity growth in both the fixed and floating exchange rate periods.
Japan's exceptionally large gains in productivity relative to its major
trading partners in the decade prior to the advent of floating exchange
rates probably contributed to its growing external surplus and associated
pressures for revaluation of the yen in the early 1970s. The sharp
appreciation of the yen at the start of the floating rate period was in

part an adjustment to these cumulated pressures, The yen has continuec to


- 30 -

in the Japanese discount rate could probably have a salutary influence on
the domestic economy without adverse exchange market effects. Also,
temporary fiscal stimulus could be provided without severely compromising
Japan's longer-run commitment to reducing the central government budget
deficit, since the fiscal measures could help set in train a self-
sustaining recovery in domestic investment and Spending. Whatever the
medicine, it is clear that actions to stimulate domestic demand would
Provide some boost to imports and help lift Japan's economy from its

current doldrums.


-31-

FOOTNOTES

*Member, Board of Governors of the Federal Reserve System.

**Staff economist in the International Finance Division, Federal Reserve
Board.

Note: This paper represents the views of the authors and should not te
interpreted as reflecting those of other members of the Board of Governors
of the Federal Reserve System or of other members of its staff. For
helpful comments, we are grateful to members of the Division of
International Finance, in particular to Ted Truman and Karen Johnson, and
to Dale Henderson. We would also like to thank Joerg Dittmer for excellent
research assistance. This paper was prepared for the conference on "Japan
and the United States Today: Exchange Rates, Macroeconomic Policies, and
Financial Market Innovations," sponsored by the Columbia University
Graduate School of Business, Japan Ministry of Finance, and the Foundation
for Advanced Information and Research on June 4-5, 1986 in New York City.

1. Throughout this paper, we adopt the convention of calculating
“percentage changes in exchange rates based on rates expressed as the
domestic currency price of foreign currency, e.g., yen/dollar.

2. In chart 2, the current account is expressed at a quarterly rate, and
“the effective exchange rate index is the Federal Reserve Board's
10-country trade-weighted average exchange rate.

3. The real exchange rate and real interest rate paths are obtained by
“adjusting the nominal values for movements in the consumer price index.
In this way, we abstract from the influence of differential inflation
in-the United States and Japan on the two series.

4, For an exposition of models of this kind, see Frenkel and Mussa (1985).
5. See, for example, Paul Krugman (1985).
6.. In chart 5, the index of the yen's value against a basket of 9
“* currencies is calculated based on the Federal Reserve Board's
trade-weighted index, dropping out the United States trade share and
renormalizing on the 9 remaining shares.

7. Recent studies include Richard Freeman (1984), Jeffrey Frankel (1984)
“and Sumimaru Odano (1986).

8. Freeman (ibid) provides a useful discussion of the impact of
"liberalization on the yen exchange rate.

9. Richard Marston (1986) studies trends in productivity in different
“sectors of the Japanese economy over the floating rate period.


-19-

Savings-investment balance. In addition to these factors that
have influenced Japan's international competitiveness, secular developments
in Japanese savings and investment have contributed to the tendency towards
persistent current account surpluses and associated upward pressure on the
yen. From the national income accounting identity, the total of private
savings plus government net savings less domestic private investment
represents net national savings, which must equal net foreign investment
or, equivalently (abstracting from official intervention), the current
account balance. This identity does not, of course, indicate d:rect
causality between any of the elements; for example, shocks to any one of
the components must be reflected in the others. But the identity does
serve to highlight the fact that a country that saves more than it invests
domestically must have,
ex post, a net capital outflow and a corresponding current account surplus.

The Japanese savings rate is remarkably high by comparison with
most other countries, although this has been true only since the
mid-1950s.13 The private savings rate began to rise in the 1950s as the
business sector saved after the initial reconstruction process following
the war, and as households sought to restore their financial positions in
the aftermath of a period of high inflation. The savings rate might have
been expected to stabilize after the reconstruction process was complete,
but instead continued to rise in the 1960s, albeit at a slower pace.
Private investment, in contrast, has not continued to climb along with
private savings. During the boom years of the 1950s and 1960s, growth of

Japanese private sector investment was extremely rapid, with investment as


concern with respect to the yen-dollar exchange rate, key structural.
differences between the Japanese and American economies suggest that:
balanced trade between them may be improbable and even undesirable for some
time.

Section I sketches the broad outlines of the factors driving
medium-run swings in the yen-dollar exchange rate over the floating rate
period. The interplay of domestic and foreign macroeconomic policies and
developments, major global supply shocks, and the liberalization of
Japanese financial markets has produced periods of more-or-less sustained
yen appreciation or depreciation. After a brief consideration in Section
Il of the implications of financial liberalization for the yen-dollar
exchange rate, Section III takes a more detailed look at the secular
developments underlying movements in the yen-dollar relationship, tracing
the evolution over the past two-and-a-half decades of some of the more
salient structural features of the American and Japanese economies.
Developments in each economy related to productivity, real wages, the terms
of trade, the composition and regional pattern of trade, and the
savings-investment balance provide insights into the longer-run trends of
the Japanese current account and associated pressures for yen appreciation
over time. Section IV weighs the relative contributions of changes in the
exchange value of the yen and other economic factors in fostering more
balanced trade between the Japan and its major trading partners, including
the United States. A concluding section distills the analysis of the paper

and comments on recent and prospective developments in the yen-dollar

relationship.


developments across countries account for much of these diverging movements.
From 1973 through the present, cumulated consumer price inflation has been
72 percent in Germany, 137 percent in Japan, 155 percent in the United
States, 250 percent in France, and 330 percent in the United Kingdom.

While developments within the various countries influenced the
extent, of the individual bilateral gains, it is clear that, overall, the
yen has made sizable net gains against virtually all the major currencies
over the floating rate Period. Chart 5 compares the yen's movements
against the dollar and against a basket of nine other major currencies,®
Because of the yen's relatively uninterrupted rise against the nine
currencies as a group in the 1980s while it rose and fell against the
dollar, the net appreciation of the yen on an effective basis (excluding
the dollar) has been about 90 percent since the start of floating exchange
rates in 1973, nearly twice its net gain against the dollar over that
period. The remainder of the paper will explore some of the sources of the
yen's remarkable Strength.

Il. The Impact of the Financial Liberalization Process on the Yen-Dollar

Exchange Rate.

Over the past decade, Japan has made Substantial progress in
opening up its capital markets. As the pace of financial liberalization in
Japan Fas accelerated in recent years, Japan's financial markets have
acquired breadth and depth, making yen-denominated securities increasingly
attractive to foreign investors, Whereas in the 1970s, capital controls
were used extensively to influence the yen, liberalized markets were not

restricted anew when exchange market pressures emerged in the 1980s.


-12-

As a general point, it is difficult to determine the
contribution of liberalization to the most recent rise of the yen because
liberalization has been occurring gradually for years. Many studies have
demonstrated that a high degree of interest arbitrage has existed in at
least; some Japanese financial markets since the late 1970s.7 Consequently,
it was to be expected that further liberalization would probably have
little impact on arbitrage opportunities other than to broaden the menu of
possible instruments for investment. In part for this reason, there is
littile evidence to date directly linking financial liberalization and
exchange rate appreciation. For example, the yen weakened against the
dollar after the May 1984 Yen-Dollar Agreement announcing further planned
liberalization measures in Japan. A strong upward move of the yen did
occur starting in February 1985, however. It is, of course, clear that
factors other than liberalization also contributed to the most recent rise
of the yen.

Other considerations complicate an evaluation of the effect of
liberalization on the exchange rate. The impact of liberalization at a
particular point in time will depend on whether an excess demand or supply
of yen assets relative to foreign-currency denominated assets has developed
as a result of the controls in place. For example, it has been argued that
the reason for the yen's decline following the 1984 Yen-Dollar agreement
was that Japanese investors at that time had a pent-up demand for
foreign-currency denominated assets, and that restrictions were removed on
both capital inflows and outflows.8 While these considerations complicate

the analysis of the short-run impact of liberalization measures on the


The Yen-Dollar Relationship: A Recent Historical Perspective
by

Manuel H. Johnson* and Bonnie E. Loopesko**

At the center of the current debate on international policy
coordination lies the question of how to foster and sustain a configuration
of exchange rates that contributes to stability in the world economy.
Underlying this debate are more fundamental issues: How are exchange rates
determined? What forces induce exchange rate movements that ex post are
judged to result in misalignments? Common to many recommendations for
reform of the exchange rate system is the notion that exchange rates should
move so as to promote better external balance. In this context, the
question often raised concerning the yen-dollar relationship is: What
level of the yen-dollar exchange rate would be consistent with a more
balanced trade relationship between Japan and the United States? Posing
the problem in this manner, however, belies the complexity of determining a
more appropriate alignment of exchange rates.

Because the issues of the alignment of exchange rates and of
external balance are inextricably linked in public debate, this paper
explores their interaction. The analysis highlights the influence of
current account developments on the yen-dollar exchange rate, as well as
the reverse. In light of the simultaneous determination of current and
capital accounts, it will also be useful at times to consider the
interaction between the capital account and the exchange rate. There is no
presumption that bilateral exchange rates should move solely to achieve
bilateral trade balance. While promotion of a reduction of Japan's record

surplus vis-a-vis the United States is clearly an important, even pivotal,


- 29 -

from about 1964 onwards pointed clearly to a growing fundamental

disequilibrium. A sizeable and timely revaluation was; in these

conditions, a prerequisite for Japan's continuing integration in
world trading relations. The revaluation was also desirable from

a domestic standpoint...The effects of the revaluation may,

however, take some time to come through...It is in the interest

of both the international economic scene and the domestic e2onomy
that quick progress should be made in reducing domestic slack and
increasing the weight of social consumption. Given such
progress, the revaluation is likely to prove a major act of
post-war Japanese economic policy, rather than an unavoidable

short-term move. (pp. 44-45)

The tendencies in Japan towards growing trade surpluses and
insufficient domestic absorption were thus already apparent in the early
1970s. The subsequent decade was punctuated by periods of prolonged
adjustment to the two oil price shocks. Now those same tendencies have
resurfaced. Despite the initial hopes of some proponents of floating
exchange rates, the move to flexible rates has not resulted on average in a
reduction in external imbalances between Japan and her major trading
partners, although sizable adjustments have tended to occur with rather
long lags.

All of this points to the need to rely on factors other than
just exchange rates to bring about better balance in the world economy.
Measures to stimulate income growth in Japan could make an important
contribution to improved external balance. The more income expansion the
Japanese authorities can encourage, the less further yen appreciation will
be required to foster more balanced trade. In light of the strains already
imposed on Japan's industries by the yen's appreciation to date, ‘incone
expansion represents an important potential impetus to further external

adjustment. There currently appears to be scope for both monetary and

fiscal actions. Given the recent strength of the yen, further reductions


- 18 -

consumer spending. Ultimately, the detrimental influence of the yen's
sharp rise on profitability of many firms proved the dominant concern; the
actual average private sector nominal wage increase is reported to be about
5 percent, little gain relative to the two preceding years. This recent
episode provides yet another example of how wage restraint has helped
foster secular gains in Japan's competitive position.

Terms of trade. Japan's terms of trade has declined
substantially since the 1960s, as can be seen in Chart 9. This decline is
composed of a relatively slow increase in export unit values and a more
rapid rise in import unit values, especially during the periods in the
1970s in which prices of raw materials rose sharply. Of course, some of
the movement in the terms of trade reflects exchange rate changes, but
price developments also play a role. A sizable share of Japan's imports
consists of raw materials that are purchased in relatively competitive
world markets in which discriminatory pricing is not practiced.

In contrast, the pricing strategy of Japanese exporters has
tended to enhance Japan's competitiveness. Japanese wholesale prices often
increased more rapidly in the 1950s and 1960s than export prices,
suggesting that export profitability was squeezed over much of tre period
while Japanese exporters expanded their world market share. In more recent
years, that gap has tended to narrow. Still, Japanese exporters have
tended to accept lower profit margins rather than to resort to snarp
increases in export prices during periods of rapid yen appreciation. This
pricing response has helped improve Japan's competitive position and

preserve or increase the global market share of Japan's exporters.


ABSTRACT

This paper explores the interaction between exchange rate alignment
and external balance for Japan and the United States. The analysis
highlights the influence of current account developments on the yen-dollar
exchange rate, as well as the reverse, and the interaction between the
capital account and the exchange rate. We first sketch the broad outlines
of the factors driving medium-run swings in the yen-dollar exchange rate
over the floating rate period. After a brief consideration of the
implications of financial liberalization for the yen-dollar exchange rate,
the paper takes a more detailed look at the secular developments underlying
movements in the yen-dollar relationship, tracing the evolution over the
past two-and-a-half decades of some of the more salient structural features
of the American and Japanese economies. Develoments in each economy
related to productivity, the composition and regional pattern of trade,
real wages, the terms of trade and the savings-investment balance provide
insights into the longer-run trends of the Japanese current account and
associated pressures for yen appreciation over time. Finally, we weigh the
relative contributions of changes in the exchange value of the yen and
other economic factors in fostering more balanced trade between Japan and
its major trading partners, including the United States. Evidence from the
Multi-Country Model indicates that a 35 percent appreciation of the yen
against the dollar over time will reduce Japan's surplus with the United

States by $20 billion.


- 25 -

inflation and enhanced use of market pricing which in turn promote more
attractive investment opportunities.

IV. The Role of the Yen Exchange Rate in Japanese Current Account

Adjustment.

For the part of the Japanese current account surplus that is not
structural in nature, the issue arises of how best to encourage rapid
adjustment. The Plaza meeting last September recognized the importance of
both yen appreciation and stimulation of Japanese growth in promoting more
balanced trade between countries. So far, a substantial yen appreciation
has been the principal outcome of this process. To obtain an idea cf the
relative importance of income and relative price influences on Japan's
trade balance, we have gathered evidence from the Federal Reserve Board
staff's Multi-Country Model (MCM).15

According to the parameters of the MCM, the price elasticities
for Japanese trade indicate that Japanese exports are highly reponsive to
relative price changes, while Japanese imports are much less responsive to
relative price movements. In fact, of the five country models included in
the MCM (the United States, Japan, Germany, the United Kingdom and Canada),
Japan faces the highest price elasticity of demand for its exports and has
the lowest price elasticity of import demand. This would suggest that the
recent sharp yen appreciation, if allowed to be fully reflected in prices,
will result over time in a sizable reduction in Japanese exports but, a less
substantial increase in imports. ,

The estimated relatively weak response of Japanese imports to

exchange rate-induced relative price changes is probably related to the


IFDP

NUMBER

288

287

286

285

284

283

282

281

280

279

278

277

276

International Finance Discussion Papers

TITLES

1986
The Yen-Dollar Relationship: A Recent
Historical Perspective

Should Fixed Coefficients be Reestimated
Every Period for Extrapolation?

An Empirical Analysis of Policy
Coordination in the U.S., Japan and
Europe

Comovements in Aggregate and Relative
Prices: Some Evidence on Neutrality

Labor Market Rigidities and Unemployment:
the Case of Severance Costs

A Framework for Analyzing the Process
of Financial Innovation

Is the ECU an Optimal Currency Basket?

Are Foreign Exchange Forecasts Rational?
New Evidence from Survey Data

Taxation of Capital Gains on Foreign
Exchange Transactions and the Non-neutrality
of Changes in Anticipated Inflation

The Prospect of a Depreciating Dollar
and Possible Tension Inside the EMS

The Stock Market and Exchange Rate Dynamics

Can Debtor Countries Service Their Debts?
Income and Price Elasticities for Exports
of Developing Countries

Post-simulation Analysis of Monte Carlo
Experiments: Interpreting Pesaran's (1974)
Study of Non-nested Hypothesis Test Statistics

34

AUTHOR(s)

Manuel H. Johnson
Bonnie E. Loopesko

P.A.V.B. Swamy
Garry J. Schinasi

Hali J. Edison
Ralph Tryon

B. Dianne Pauls
Michael K. Gavin
Allen B. Frankel
Catherine L. Mann

Hali J. Edison

Kathryn M. Dominguez

Garry J. Schinasi

Jacques Melitz
Michael K. Gavin
Jaime Mar quez

Caryl McNeilly

Neil R. Ericsson

Pleese address requests for copies to International Finance Discussion
Papers, Livision of International Finance, Stop 24, Board of Governors of

the Federal Reserve System, Washington, D.C.

20551.


- 20 -

a share of GNP rising from 8 to 20 percent over the two decades. The
government ran a small net surplus over that period, thereby partly
financing the corporate borrowing requirement, while the external sector
was in rough balance until the late 1960s. Thus, the strong and rising
household savings were absorbed by corresponding increases in the corporate
borrowing requirement.

As Japanese growth slowed in the 1970s, the share of private
investment in GNP fell back to around 15 percent and has remained stable at
about that level in recent years. The private savings ratio did not
decline in the 1970s, however, and even increased temporarily in the
aftermath of the 1973 oil price hike as the heightened uncertainty and
rising inflation led households to save more in order to rebuild the real
value of their financial assets. The table below presents household
savings as a percentage of personal disposable income for 1985 for five
countries.

1985 Personal Savings Ratios

(percent of personal disposable income)

Japan 22
Germany 13
Canada 12

United Kingdom 12
United States 5

Public sector spending in Japan generally increased over the
1970s. By 1979, the general government deficit as a share of GNP had
reached 4.8 percent, thereby absorbing some of the private sector savings.
Since 1979, however, Japanese fiscal policy has been oriented towards

reducirg the level of the fiscal deficit, largely by reducing government


-10-

have different preferences with respect to the currency denomination of
their investments, exchange rates will move to re-equilibrate asset markets.
Another channel emphasizes intertemporal considerations and argues that the
exchange rate will gradually adjust to prevent current account imbalances
from becoming unsustainably large. This latter hypothesis has received
consicerable attention in recent years in light of the record U.S. and
Japanese trade imbalances.> Finally, there are a number of underlying
economic developments which influence both exchange rates and current
accounts, and which may at time cause them to respond together. Shifts in
Productivity growth across countries are one example of this type of
phenomenon,

The exchange rate, in turn, also influences the current account.
over time through its impact on the relative price of national outputs,
Relative prices of domestic and foreign goods are strongly affected by
exchange rate movements in the short-run due to slower adjustment of prices
in goods markets relative to asset markets. The impact of the exchange
rate on current account adjustment is discussed in Section Iv.

As a fifth and final point, it is worth highlighting the
differences between the yen's movements in the past 12 years against the
dollar and against other currencies, Chart 4 shows the widely diverging
paths of bilateral yen exchange rates against four major currencies, While
the yen has made net gains of about 140 percent against the French franc
and pound sterling over the floating rate period, it has only appreciated
50 percent against the dollar on balance and just 20 percent against the

mark. Of course, differences in inflation and other macroeconomic


9961 ve6l Ze61 Og6l Q/6L 9/61 ve,

OL a |
og - -

O6 +
OOL +
OLL F
Oa +
Of! -

- 11A -
RTS

Cl

Ovl
OSL
OSL
OZ)

O8l F

O61 ‘ (SN "TOX3) ALVY X3 SAV GSLHDISM = ------- _|
XSGNI NSA/¥vT100 SN = ——————

Od —
0 OO} = £26} HOUVN

S3LVH SDNVHOXS N3A/2V110"0 GNV (SN 10X43) N3A SDVYSAV-GaLHDIAA