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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Robert Douglas who wrote (6625)	9/24/1998 3:09:00 AM
From: Frodo Baxter	Respond to of 9980

>Please clarify the mechanism by which the Plaza Accord caused the asset bubble in Japan. Your posts suggest a role played by the rising yen. Was it anything more than a psychological validator or was there some greater cause-effect mechanism in place? Usually (as our SE Asian friends have found out), you can't get rich by just printing more dough. Currency depreciation and domestic inflation guarantee that you end up right where you started (eventually). But what if a bunch of political hacks informed by a bunch of economic hacks tells you that the dollar is "overvalued," the yen "undervalued," and that reversing that would be great statemanship? Never mind all the contributions you can get from auto makers and friends. >Also the chronology does not seem to match your thesis. The critical phase of the Japanese stock market bubble occurred during the two years that began in Jan. of 1988. It was during this blowoff period that the Nikkei Index went from 21,000 to 39,000. However during this period, the yen actually declined versus the dollar by about a fourth. It was only after the Nikkei began its descent that the yen doubled in value. (From 160 to 80 yen/dollar) Japan was growing her money supply at 10% all through the 80s, while the US began the slowing down the rate growth about midway through the 80s. How do asset bubbles get started? Money growth without inflation. Exceedingly rare, but it happened in the US in the 20s, Japan in the late 80s, the US in the late 90s (OOPS!). Actually, all you need to do is import deflation. Which means that an appreciating currency is necessary (sufficient?) for an asset bubble. I can offer no satisfactory explanation for why the yen managed to appreciate even further after the bubble burst. That move to dollar/yen of 80 was just plain nuts. >One further point which we have skirted around in our discussions on the "true" value of the yen. You say that the U.S. was doing fine with the dollar at the preposterous levels of the mid 80s. My recollection of the period was that it was a disastrous one for U.S. manufacturers. In my files on the period I have a picture of a Caterpillar worker holding a sign saying "HELP CATERPILLAR, NOT KOMATSU" Of course you know my thoughts on the subject. I believe that the dollar was almost 50% overvalued at its peak. The reason this "true" value is so interesting is that it defines where equilibrium is, NOT that it predicts short-term exchange rate movements. What I'm suggesting is that the sins of the past will come back and bite Japan in the arse, just like it has for all her neighbors that expanded money faster than productive capacity. Sure, Japan's exchange rate is floated, while the SE Asians were pegged. THAT DOESN'T NECESSARILY MEAN THE RATE IS CORRECT AND NOT SUBJECT TO DRAMATIC SWINGS, I think towards 300... Finally, short of the recession in the early 80s, the US had about 4% real GDP growth throughout the 80s. There's nothing preposterous about the awesome American economic machine, still the only true modern capitalist society.