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Lessons From Japan’s Failure

Feb 22, 2022

 NOTE: The following is the keynote remark by Yasuo Fukuda on the 3rd Hong Kong Forum on U.S.-China Relations held from January 19 to 21, 2022 and co-hosted by China-United States Exchange Foundation (CUSEF) and the China Center for International Economic Exchanges (CCIEE). Against the stark backdrop of the ongoing global pandemic, the online forum — themed “Beyond Differences, Towards Cooperation” — brought together more than 30 global leaders and experts to examine key challenges and areas of cooperation facing the United States and China.  

We aim to capture the forum in its entirety with the publication of all keynote remarks. The transcripts have been lightly edited for clarity. 


A global concern this year remains the China-U.S. relationship. Their rivalry and friction lead to anxieties at and even global levels. But I don’t look at their relations in a pessimistic manner. Last year, the Chinese and U.S. heads of state held a virtual summit, and I think that both President Joe Biden and President Xi Jinping want to avoid head-on competition. I believe the two leaders agree with each other on this issue. 

The United States wants to hold back China’s development by hyping up cliches, such as issues related to the South China Sea, Taiwan, Hong Kong and human rights. At the same time, it asks its allies to build networks to contain the rise of China and fans the flames on the world stage to create an anti-China climate. In this context, what issues do we need to think about? Economic issues, and especially China-U.S. trade frictions. 

As we know, the U.S. has a long-term trade deficit with China. This is a topic we can’t afford to dismiss. Like China, Japan faced similar issues, and it suffered tragic consequences. I have consulted many documents and found that in the 1980s, a major issue of concern in Japan-U.S. relations was the trade deficit. Back then, the U.S. also had a trade deficit with Germany, although on a smaller scale. 

Interestingly, both Germany and Japan, which were defeated in World War II, rose to a favorable economic status in the world after decades of growth. 

To correct trade imbalances, the U.S. held a meeting in the Plaza Hotel in New York City in 1985 asking Germany and Japan to increase their exchange rates in an agreement known as the Plaza Accord. The Japanese yen appreciated significantly. The Japanese government signed the agreement because it wanted to reduce exports to address American concerns and maintain good relations with Washington. 

Before the Plaza Agreement, one dollar was equivalent to 240 yen; at the end of 1986, the yen’s value against the dollar had increased by 70 percent, and one dollar was equivalent to 160 yen. By the end of 1987 it was 120 yen. In other words, the Japanese yen’s value vis-a-vis the dollar doubled in only about two years. 

The dramatic increase seems incredible today. Japan’s exports stagnated, and the domestic manufacturing sector, especially small and medium-sized enterprises, was gripped by a tremendous crisis. The sharp rise also led to a protracted period of low growth in Japan. To address this problem, the government reduced interest rates many times, and in an effort to boost domestic demand, banks channeled capital and assets into the real estate sector, which created a bubble. 

At the height of the bubble economy, the financial sector in New York was dominated by Japanese capitalists. This fueled anti-Japanese sentiment across America in both the public and private sectors. To ease that, Japan provided military support worth $13 billion, or 1.5 trillion yen, to the United States, which was busy with wars overseas at the time. 

These stories tell us that trade deficits and trade surpluses are essential to state-to-state relations. It is important to address bilateral economic issues in the long run, but in the short term, some actions are needed. For example, we can make our economies more free. The trouble is that many financial and economic issues are beyond anyone’s control, such as the 2008 financial crisis and the bankruptcy of Lehman Brothers. These events are something we can do almost nothing about. 

Over recent decades, China has grown stronger, and this is something not lost on America. Japan used to be formidable, but today China has taken its place. America has seen a need to contain its development. Thirty-five years ago, Japan increased the value of its currency forcefully and took a series of measures to boost domestic demand. Its economic policy didn’t achieve much. It ended up in failure. So, what are the weaknesses of its policy? The answer to this question is relevant to China. 

Generally speaking, exchange rates can rise, but a dramatic increase in the short term causes big trouble. The fact that the Japanese yen’s value versus the dollar doubled in just two years seriously impacted the domestic economy. I think that such a dramatic rise should be achieved in 10 years, rather than two. To reverse the declining trend, the Japanese government repeatedly reduced interest rates, but doing so led to a bubble economy. Many banks grappled with massive non-performing loans; many commercial banks shut their doors; the entire financial system broke down; and Japan’s industrial policy entered a protracted period of stagnation. 

In the end, Japan’s economic policy failed, fundamentally as a result of the dramatic appreciation of its currency in a short period of time. For China, therefore, an important issue is about finding the right way to increase interest rates and boost domestic demand. The issue is also relevant to the resolution of trade frictions. 

At present, the biggest problem in China-U.S. relations is trade friction. In this regard, Japan’s experience in boosting domestic demand and making trade policy can be drawn upon. Hopefully, China will not repeat the mistake of Japan and it can work with the United States to address frictions by meeting each other halfway. 

When claiming to address bilateral trade issues, the United States has expressed concern over other matters in China, including human rights and democracy. In the name of spreading its so-called universal values, it wants to interfere in China’s growth process. I hope that China will not back down on these issues and just focus all its energy on the resolution of trade issues. In fact, the two countries have what it takes to make their trade more balanced and to secure more stable economic exchanges. 

Indeed, the United States is the dominant player on the world stage. It adopts its own solutions on immediate issues and imposes its values on others. I hope that all nations can think about the future from the perspective of freedom and equality. Only in this way can we embrace a better future. Only in this way can we make the earth even more beautiful. This is what we all aspire to. 

Nations don’t act alone on the world stage; they have to work together with each other and take into account the interests of others. From climate change to water shortages and poverty, many issues need to be addressed that relate to the development of the planet. The resolution of issues between China and the U.S. has a bearing not only on the two countries but also on the wider world. China-U.S. trade and economic issues also impact the development of the Japanese economy. Therefore, Japan has to consider helping the two address their issues. We hope that China and the United States can move forward together. This is what I want to share with you. I hope there will be no dissonant voice in Japan’s relations with both China and the U.S., because such noise casts uncertainty over the world.

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