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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (590)	9/6/1998 5:14:00 PM
From: Frodo Baxter	Read Replies (3) \| Respond to of 3536

Henry, et al. Let me float a plausible, but rather underdiscussed, theory here. Tell me what y'all think. In the early 80s, the rise of Japan Inc. was like an unyielding typhoon. Anybody could see it, if they were looking at the right place, the U.S. trade deficit. But of course, as we've recently discussed, the trade deficit is a mirage, a small puzzle piece in the larger international economic landscape. In fact, the currency exchange rate was the best marketplace indicator of the real strength of Japan vis-a-vis the U.S. Sure, Toyotas were flooding our borders, but that was only at the expense of domestic protectionism and a marketshare-seeking, rather than profit-seeking motive. In other words, Japan Inc. was beggaring herself. The exchange rate reflected this rationally. But then the Plaza Accord was signed. Exchange rates stopped being rational. The dollar depreciated. The U.S., which was doing fine to begin with, now had an undervalued currency and entered a period of superb internal growth while retrenching a bit from international economic hegemony. The situation in Japan, however, was disastrous. The marketplace signals were all wrong, and Japan Inc. was actually rewarded for pursuing irrational, value-destroying strategies. After all, the yen was rising, wasn't it? Is it any wonder that an asset bubble developed? Back to the present, what is the lesson in all this? Well, the Plaza Accord was a wrong-headed attempt to manipulate exchange rates that had the unfortune of succeeding. And that dollar-yen exchange rates were more rational immediately preceding it. The rate was 250 back then. Factor in a dozen years of awesome economic growth in the U.S., and not much of anything from Japan, and you realize that equilibrium will be restored when dollar-yen hits 300 or so. Right???