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The Impact of The Over Inflation of The Yen on The Japanese Bubble

The Impact of The Over Inflation of The Yen on The Japanese Bubble

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The Impact of the Over Inflated Yen on the Japanese Economic Bubble Brian McGinnis IR 163 Professor Wylie 4/28/08 Contents
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Brian McGinnis Introduction……………………………………………………………………………..Page 3 Era of Indulgence……………………………………………………………………….Page 6 The Bubble Bursts………………………………………………………………………Page 9 Conclusion………………………………………………………………………………Page 11 Notes……………………………………………………………………………………Page 14 Sources………………………………………………………………………………….Page 15 In 1949 under the Bretton Woods system, the Japanese yen was created as a finite currency and pegged to the United States currency at a yen to dollar rate of 360 yen to one dollar. Prior to the 2
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Brian McGinnis U.S. occupation of Japan, the yen was held on the silver standard. During the occupation, the yen was placed under control of the Bank of Japan (BOJ) and managed by the U.S. Federal Reserve. The BOJ was under strict orders by the Federal Reserve to keep yen inflation in accord with the inflation rate of the U.S. dollar. Thus, U.S. monetary policy kept the Japanese economy at small growth rates. By the 1950s, sparked by the Korean War, the first Japanese economic boom occurred. The war created an infusion of yen into not only Korea but established the yen as a trusted currency throughout East Asia. Economic boom cycles continued until 1971 when President Nixon took the dollar off the Bretton Woods system. This decision caused the dollar to yen exchange rate to deflate. At one point the exchange rate appreciated to 240 yen to one dollar. Another more immediate and direct appreciation of the yen occurred following the 1985 Plaza Accords. These significant events led to an increase in Japanese purchasing power and an increase in loans by the BOJ as a result of low interest rates. During the late 1980’s, the “easy money” period inflated the Japanese bubble economy and produced growth rates that were unparalleled. The bubble economy had grown at an uncontrollable pace as consumption increased to exorbitant levels in Japan. The 1980-89 rapid appreciation of the yen led to unsustainable growth of the Japanese economy and the subsequent devastating Japanese economic collapse. Was the over inflated yen the cause of the Japanese economic bubble? The yen is one of the oldest currencies in existence and its history is full of devaluations and consequential periods of economic boom-bust cycles. The yen was first recognized as the official currency of Japan in 1872 under the Meiji government. Its value was held in accord to the silver standard, similar to the United States reliance on the gold standard. As a consequence of the Japanese victory in the Sino-Japanese war, China paid its reparations to Japan in gold. Thus, the 3
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Brian McGinnis yen moved from a silver to gold standard. The yen continued on the gold standard until The
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