Can a Rapidly-Growing Export-Oriented Economy Smoothly Exit an Exchange Rate Peg? Lessons for China from Japan's High-Growth Era

57 Pages Posted: 20 Nov 2005 Last revised: 22 Nov 2005

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Mariko Hatase

affiliation not provided to SSRN

Date Written: September 2005

Abstract

We explore the parallels between Japanese currency policy after World War II and Chinese currency policy today. After two decades of pegging at 360 yen, Japan decoupled from the dollar on August 1971 and then repegged at a revalued rate of 308 yen. After stabilizing the exchange rate at this new level for about a year, greater flexibility was introduced. This phased adjustment - revaluation followed after a time by an increase in flexibility - bears more than a passing resemblance to recent Chinese policy initiatives.We analyze the impact of Japan's exit from its peg on exports and investment. The results point to sizeable effects of the yen's revaluation on both variables, especially investment. While our analysis suggests that a rapidly-growing, export-oriented economy can operate a heavily managed float despite the presence of capital controls and the absence of sophisticated foreign currency forward markets, it underscores the importance of managing the exchange rate with domestic conditions in mind and avoiding the kind of large real appreciation that would sharply compress profits and damage investment. For China this suggests starting with a modest band widening and a limited increase in flexibility, and not with a large step revaluation which could have a sharp negative impact on investment and growth. Our results thus provide support for the kind of measures taken at the end of July.

Suggested Citation

Eichengreen, Barry and Hatase, Mariko, Can a Rapidly-Growing Export-Oriented Economy Smoothly Exit an Exchange Rate Peg? Lessons for China from Japan's High-Growth Era (September 2005). NBER Working Paper No. w11625. Available at SSRN: https://ssrn.com/abstract=807614

Barry Eichengreen (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mariko Hatase

affiliation not provided to SSRN

No Address Available

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