Synchronized Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate
HKIMR Working Paper No. 02/2003
23 Pages Posted: 4 Sep 2007
Date Written: January 2003
Because many authors have proposed stimulating the ailing Japanese economy by monetary expansion and yen depreciation, we explore the repercussions of depreciating the yen against the dollar on the other East Asian economies - which largely peg to the dollar. Since 1980, economic integration among Japan's neighbors - China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand - has intensified and (except for China) their business cycles have been highly synchronized. These cycles have been closely linked to fluctuations in the yen/dollar exchange rate - through changes in their export competitiveness and inflows of foreign direct investment. We show that a major yen devaluation would have a negative impact on incomes in other East Asian economies and that it is not a sensible policy option for Japan.
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