The Japanese yanked a huge sum out of the US bond market in 1987, which precipitated the crash in the Dow. The second largest economy in the world was the Japanese market, and repatriating their capital helped them drive that wonderful bubble from which they have yet to recover
actually, the Japanese in 1987 had long-term capital outflows of nearly 20 trillion yen, well in excess of their current account surplus of 12.5 trillion yen. the Japanese were then engaged in extreme damage control and working overtime to prop up the dollar, which had collapsed in the wake of the Plaza Accord in 1985. over an 18-month period following the Accord, the yen had spiked from 240 to the dollar to 140. this was much stronger than the 180 yen level (a level the yen had briefly broken in a dollar panic in 1978) which the Japanese had thought they could hold and where they had drawn their "Maginot line".
an important point of the Plaza Accord was that the USD was too strong and the Japanese were eating the American manufacturers' lunch. the orchestrated dollar devaluation was intended to give US makers breathing room. if all had followed according to plan, Japanese should have seen a rise in imports and a fall in exports due to their appreciating currency following the Plaza, while Americans should have seen the opposite.
"should" is the operative term here, because it rests on the assumption that capitalist countries (and individual entities) will seek a profit on their goods; that banks will require a positive spread on their lending; that imports costing an order of magnitude less will displace domestic production; etc. Japan's mercantilist policy, which was not understood then (or now) by the West, flew in the face of the theory.
in fact, the Japanese current account surplus in 1987 was nearly 50% larger than in 1984, despite the tanking dollar. this occurred because the mercantilist policy of the Japanese Ministry of Finance, working with the Bank of Japan and Japanese banks, extended essentially limitless credit to Japanese manufacturers so that they did not trim capacity even when cash flow went negative. instead, the land-backed asset bubble allowed them to keep borrowing (in fact they were forced to borrow), rolling proceeds into not just capacity expansion, but also US assets without regard for profit.
by August 1987, the world came to realize that the US trade deficit was not improving, and this caused the dollar to tank. many believe this was a cause of the October crash. this was a bad situation for Wall St, but perhaps a worse situation for the Japanese. a plummeting dollar, if allowed to fall to its "natural" value, might make Japanese goods so expensive that manufacturers would lose money on every unit shipped.
following October, the MOF orchestrated coordinated operations to prop up the dollar. this involved massive imports of short-term dollars by Japanese banks taking deposits from their US and European counterparts. for example, whereas in 1986, short-term capital inflows were negative 313 billion yen, in 1987 they rocketed to positive 3.4 trillion yen, and remained above 2.5 trillion annually through the end of 1990. these funds were then recycled as long-term capital exports through purchases of Treasurys and other US assets. among other things, Japanese banks issued dollar-denominated paper abroad and rolled the proceeds into Treasurys at a negative spread! they had no choice, as they had to follow the orders of the MOF and the BOJ.
The largest investors have the problem of finding a market big enough to absorb their capital.
without making an already long post much longer, let me say that in the case of Japan and the other mercantilist Asians running huge current account surpluses with the US, there are national policy considerations that override what Westerners would normally think of as criteria for rational investment. i believe this is largely responsible for the continued strength of the dollar, low inflation, and low interest rates in the face of our low savings rate and high, structural, current account deficit–i.e., our ability to run a "deficit without tears". in sum, they are as addicted to selling to us as we are buying from them, and they will do whatever they can to prop up the dollar.
however, whatever they can do may not be enough. prices change at the margin. that, and i think the MOF is really losing its grip, which should make for some "interesting times" ahead. |
